Evidence from international cities shows financial independence improves economic performance, the Institute for Public Policy Research (IPPR) said.

Wednesday's Centre for Cities report recommends England's two largest "city regions" should be in charge of their own economic development.

It said a levy on business rates could raise �35m annually for both regions.

Greater Birmingham to include: Solihull Sandwell Walsall Wolverhampton Coventry Bromsgrove Dudley Redditch North Warwickshire Tamworth Lichfield Cannock Chase

Part of the proposal would be for both new regions - based on the cities and neighbouring councils - introducing a levy which could only be spent on transport projects.

The enlarged Birmingham region would be based on England's second-largest city - with the Black Country and Coventry, plus parts of Warwickshire, Worcestershire and Staffordshire - and look after more than 3m people.

The new Manchester area would also take in areas from its neighbouring counties and have just under 3m people.

The IPPR's Dermot Finch said: "[The cities] are big enough to control their own economic development.

"This is the best way for them to increase jobs, improve transport and drive economic growth.

"Unelected regional quangos are too big and undemocratic but local authorities are too small. Directly-elected mayors will be controversial but they provide clear leadership and a visible line of accountability."

Greater Manchester to include Salford Trafford Stockport Tameside Bury Bolton Wigan Macclesfield Oldham Rochdale

The plan would see �1.2bn redirected to the cities from funds controlled by the existing regional bodies.

The proposals were met with a mixed response from business and central government.

The British Chambers of Commerce (BCC) said the study identifies cities as "economic powerhouses" which need greater autonomy, but said greater trust was needed between local authorities and businesses.

BCC's director-general David Frost said: "Nothing less than a reinvention of civic leadership is required, where the business community is effectively engaged in decision-making, not just scrutiny.

'More consultation'

"Financial devolution cannot happen until and unless we achieve this."

The Office for the Deputy Prime Minister said it was keen for strong leadership in cities and believed directly-elected mayors is one option.

But it needs more time to consult before committing either way.

In a statement, it said: "The government is currently addressing the question of financial devolution through the Lyons Review, which will make recommendations for reform in time for the Comprehensive Spending Review 2007."