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The report from the OECD illustrates that between 2000 and 2008, the UK fell from third highest to fifteenth among top industrialised nations for the proportion of young people graduating. The UK now trails Poland, Iceland, Portugal and Slovakia in this respect.

 Analysts warned that cuts to higher education funding – and a possible future reduction in the number of university students – could damage the economy.

 Andreas Schleicher, head of the Organisation for Economic Co-operation and Development’s indicators and analysis division, said that graduates earned far more in later life than those who left education at 16 or 18, meaning they paid higher taxes and exercised more spending power.

 It comes amid fears that university budgets could be slashed by up to a third when the Government publishes its Comprehensive Spending Review next month.

 Dr Wendy Piatt, director-general of the Russell Group, which represents 20 top universities, said Britain "risks jeopardising the competitive advantage which has made its universities the envy of the world".

She added: "While our universities are bracing themselves for a period of austerity and uncertainty, other nations are rightly pumping billions of dollars into their institutions at this key time before the world economy picks up." If universities are hit by more cuts, "we could well be relegated to a lower division of higher education quality from which we would struggle ever to recover”, she said.

 Sally Hunt, general secretary of the University and College Union, which represents lecturers, said: "Today's report shows a worrying decline in the UK's standing in theworld of education.

"We have plummeted down the graduate league table, going from a major player to a relegation candidate in less than a decade. The coalition Government's refusal to fund sufficient university places this summer will come back to haunt us.

"Other countries are preparing to play a leading role in the new knowledge economy while we risk consigning a generation to the scrapheap of inactivity and being left behind."

 This annual report from the OECD surveys the changes in education systems in almost 40 leading industrialised economies.

 Finland has the highest graduation rate among young people - 46% of men and 80% women - compared with 30% of men and 40% of women in the UK, with these latest OECD figures drawn from 2008.

 The OECD's report, which looks at education from an economic perspective, argues that both individuals and the wider economy gain an advantage from increasing graduate numbers.

 Mr Schleicher says that unemployment rates remain much lower for graduates than non-graduates. Graduates are also continuing to earn more than non-graduates - even though in the UK there has been an erosion of that advantage.

 Universities Minister David Willetts said the report showed that higher education "faces some real challenges, which the government is determined to tackle".

"We have already taken action to boost student numbers by funding an extra 10,000 places and more people than ever are starting university this autumn."