The European Union's financial auditors will next week refuse to approve its accounts because of financial irregularities and missing money amounting to more than £3 billion sterling - five per cent of the EU's £63 billion budget.

The annual report of the Court of Auditors, to be presented to the European Parliament in Strasbourg on Tuesday will blame fraudulent claims for grants and inadequate accounting procedures in member states and the EU itself for the losses.

It will state: "The incidence of errors affecting...transactions is still too high for the Court to provide assurance about their legality and regularity."

The report follows a warning by Mr Bernhard Friedmann, the court's German president, that the scale of financial mismanagement could undermine the European Union.

In an interview with the German magazine Stern this week, Mr Friedmann said: "If fraud in the European Community goes on as it is, then it could bring down the whole of the EU... It is already virtually impossible to control from Brussels everything the community takes part in. It will become even harder in future."

Mr Friedmann accused the European Commission, the EU's civil service, of telling the auditors untruths about where the money is going.

Publication of the report follows recent revelations that around £600 million of humanitarian aid in developing countries in the early 1990s could not be accounted for and the Commission's sudden discovery earlier in the year that £300 million of grants for aid and social projects could not be allocated because they had not been legally approved.

The latest figures are bound to reinforce public scepticism about EU expenditure, coming also in the wake of revelations about the high expenses and lavish perks claimed by MEPs, which the report describes as excessive.

The latest report which will be the fourth to be published by the court, the EU's financial watchdog body, shows little change from previous years' grim picture of money being falsely applied for from the common agricultural policy and regional funds by farmers, businesses and training bodies and being disbursed with little grip on whether the expenditure is legal or justified.

The report highlights illegal claims but also underlines systematic administrative weaknesses and accounting errors. It says there are "an unacceptably high incidence of substantive errors in transactions underlying the Commission's payments."

Every year the Commission claims it is tightening up accounting procedures and blames the 15 member states - which are responsible for administering 80 per cent of the EU budget - for not taking adequate measures to keep track of spending. The report will say that more than 8 per cent of the structural fund budget, to improve regional infrastructures, went astray last year.

It will say that two thirds of all payments are made on the basis of information supplied by the recipients themselves and that too often the administration of Community finances is influenced by a spending culture, measuring a policy's success by the amount spent rather than the result achieved.

The report will say the auditors cannot give an assurance that fraud and "intentional irregularities" have not occurred.