London is still the best city in Europe to invest in despite the recession, an independent study has found.

It beats rivals such as Paris and Madrid despite the decline of the banking sector, which some commentators feared would hit the UK harder than other countries.

City mayor Boris Johnson welcomed the report, saying: "The recession might be beginning to ease".

The findings with published by US-based chartered accountants Ernst & Young, in its annual survey of inward investment.

It found that investors had more confidence in "global cities" such as London to bounce back from the recession than their second-tier rivals.

The findings were based on the number of direct investments - such as building a factory or buying land - by companies based in one country which invest in a another country.

In a statement accompanying the report, Ernst & Young said: "London, which retained its position as the most attractive city for inward investment in Europe in 2008 for the 7th year in a row, secured 262 projects.

"However, London was not completely immune to the grip of the downturn with a 14 per cent decline compared to 2007, halting a four year growth spurt.

"But, in comparison to its closest European city rivals, the capital received a relatively high number of projects, with Paris coming in second with 222 projects and Madrid third on 80."

London Mayor Boris Johnson welcomed the report. He said: "These findings concur with a number of reports this week, which suggest that the recession might be beginning to ease.

"A key priority of mine throughout the past year has been to shout from the rooftops at every opportunity that London is the place to invest in and to visit.

"It also confirms that our work of ‘selling' London abroad is paying off and our city is both winning through these tough times and looking forward to an extremely bright future."

But the MP representing London's financial heartland offered a more gloomy analysis, claiming that the bail-out of the banks might harm the economy in the long run.

Mark Field (Con Cities of London and Westminster) said that bailing out the banks had sent the message that they would not be allowed to fail - which would encourage them to make more mistakes in the future.

Speaking in the House of Commons, he warned: "I fear that the banking bail-outs will turn out to be an expensive failure. Indeed, that has already been proved to a large extent."

He added: "The wisest policy option is to create smaller, more competitive financial institutions, and I fear that nationalisation, of which we may see more, leads us in precisely the wrong policy direction.

"The best form of regulation must always be open competition, and public ownership is anathema to that policy goal."

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