MEPs were considering a European Commission proposal for "withholding tax", a compulsory EU levy on all interest payments on cross-border savings.

The aim of the tax is to prevent tax evasion when investors keep their capital in another member state, picking up tax-free interest.

Under the planned EU tax law, all interest on savings is liable for tax, either directly or via a legal pledge between national tax authorities to inform each other of investments in their territory.

MEPs backed a recommendation by their own economic committee approving the goal of harmonising savings interest tax across Europe and rejecting the UK Government's amendment to exempt eurobonds from the tax.

Their opinion on the draft savings tax is non-binding on the 15 EU finance ministers who must vote unanimously for it to become law.

UK fears

Labour Euro-MPs, who were outvoted, vowed to carry on the fight being led by UK Chancellor Gordon Brown.

Chancellor Gordon Brown has promised to veto the proposal

Mr Brown has warned that the tax could be disastrous for the City of London, especially if the eurobond market is affected.

He has said he is prepared to veto the whole plan if necessary when it comes before EU finance ministers for a final decision.

Opponents believe the eurobond market could transfer from London to New York, with disastrous financial consequences and the loss of thousands of jobs.

Labour MEP Simon Murphy, who tabled the amendments to try to protect the eurobond market, said up to 110,000 jobs in the City of London could be hit if trade was driven away.

"Already there are indications that other countries are preparing for any new opportunities that arise as a result of EU action. There will also be no benefit to exchequers as the taxable interest payments will be outside the 15 member states," he said.

'No surprise'

The British Bankers' Association said it was not surprised by the vote.

"At the end of the day, this was an opinion from the parliament. The real work now starts on (seeking to influence) the ministers' decision towards the end of the year. We are fully supported by the British Government on this," the BBA's Paul Tipping said.

Shadow Chancellor Francis Maude urged Mr Brown to "just say no" to the savings tax plan.

"This savings tax would be disastrous for the City of London - Gordon Brown must say once and for all that he will veto it."

EU finance ministers are due to consider the proposal on 15 March, although any final agreement is still some months away and is linked to progress on other tax proposals aimed at the corporate sector.

EU leaders have set themselves a deadline of the end of1999 for reaching agreement on the whole tax package.