An American-run surveillance network set up during the Cold War is being used for economic espionage, prompting French companies to encrypt sensitive information, the French Government has said.

The French Justice Minister, Elisabeth Guigou, told parliament that the Echelon surveillance network - which can intercept private telephone conversations, faxes and e-mails worldwide - had apparently been diverted to keep watch on commercial rivals.

Her comments came as a report commissioned by the European Parliament alleged that the UK was helping the US to spy on its European partners.

Both the US and the UK have denied the allegations.

"US intelligence agencies are not tasked to engage in industrial espionage or obtain trade secrets for the benefit of any US company or companies," State Department spokesman James Rubin said.

The British Prime Minister, Tony Blair, denied the allegations, saying there were strict rules governing such issues and they were always applied.

"There is absolutely no bulk espionage as the French and others are claiming," a senior Foreign Office official said.

Partners

European parliamentarians have demanded an inquiry into the report, which also states that Canada, Australia and New Zealand are also partners in the operation.

Echelon was originally set up to eavesdrop for security purposes on the communist states of eastern Europe in the Cold War.

But its existence was only recently confirmed by the US Government through the declassification of secret documents of the US National Security Agency (NSA).

Most of the Echelon installations are in the US and UK.

The report, compiled by independent Scottish investigative journalist Duncan Campbell, lists a number of incidents in which it is alleged Echelon was used to help US firms win commercial contracts at the expense of its European rivals.

Information gathered through Echelon is alleged to have caused French firm Thomson to lose a radar contract in Brazil and the European Airbus consortium to miss out to the Boeing Corporation of the US in competition for a $6bn aircraft contract.

Ms Guigou said businesses now had to be particularly vigilant.

"Communications must never carry vital information, especially when the link is made via a satellite," the minister said.

After presenting the report to the European Parliament's Committee for Justice and Home Affairs, Mr Campbell urged the European Union to take action to protect against unwanted interception of communications, insisting that the eavesdropping violated human rights.

Mr Campbell alleged that national security agencies were using several major US corporations to aid their interception of data capabilities.

He named Microsoft, IBM and a certain "large American microchip maker" as providing product features which allow for the interception of information.

Earlier on Wednesday, New Zealand denied that it was involved in commercial spying.