They found that errors totalling about �3bn in European payouts may have been made in 1998, with the Commission unable to verify the legality of many of its transactions.

British taxpayers need to be protected from being short-changed in Europe

Francis Maude Shadow foreign secretary

In a report to Parliament, Sir John called for the Commission to press on with putting in place clear accounting policies to improve the reliability of its accounts.

The irregularities were first uncovered last year by European auditors looking into the Commission accounts for 1998.

Sir John called for urgent action to stop the high rates of error found in expenditure on the European Regional Development Fund and the European Social Fund.

He also warned there needed to be a simplification of the Common Agricultural Policy and other schemes to minimise the risk of fraud and irregularity.

Anti-fraud office

The Commission and member states, including the United Kingdom, are already taking action to improve the management of community funds.

Last month the Commission approved the strategy for reform and modernisation developed by Commission Vice-President Neil Kinnock.

A new independent internal audit service starts work at the commission next week and a permanent anti-fraud office is already in place.

Neil Kinnock: Pushing through programme of reform

Other measures to tackle fraud include a radical overhaul of financial management and control systems aimed at creating a culture where managers take responsibility and are accountable for their actions.

"It is important that the United Kingdom Government continues to seize all opportunities to facilitate and support the Commission's far-reaching programme of reform to ensure that its impetus is maintained and improvements in financial management are secured," Sir John said.

"The National Audit Office will continue to give a high priority to examining the way that United Kingdom departments manage community funds in the future and to co-operating with the European Court of Auditors."

Shadow foreign secretary Francis Maude welcomed the report.

"The government needs to act on it and tell the EU to improve its standards," he said.

"British taxpayers need to be protected from being short-changed in Europe."

Last year the entire Commission resigned in the wake of a damning report exposing fraud, corruption and mismanagement at senior levels.

The revelations came after Dutch Commission official Paul van Buitenen uncovered widespread levels of fraud and mismanagement.