'Crucial 6 months' for City as top spot status threatened

The City of London analysis, which ranks the competitiveness of financial centres, shows the capital is only slightly ahead of New York as the world's most favoured place to do business.

The gap between the two cities - calculated using a rating scheme based on experts' views of business conditions - has halved since the autumn and stands at just nine points.

The Government's taxation plans over "non-doms", the Northern Rock saga and increasing concern about the overall taxation regime have caused confidence in London to slip significantly.

By contrast, New York's appeal has remained virtually static despite the crisis in the US over "sub-prime" mortgages and recession fears.

Experts say the results of the study, known as the Global Financial Centres Index, mean that London now faces the danger of being toppled from its number one ranking unless ministers respond when taking vital economic decisions over the next six months.

Among the key issues are the detail of the Government's "non-dom" plans and the threat that the proposed new £30,000 levy will be accompanied by further damagingly complex taxation rules. The new study also highlights concerns about the Northern Rock affair and its effect on confidence in how the country's banking system is run.

It indicates that the Government's review of how the Bank of England and the Financial Services Authority carry out this function - and what decisions are taken - will be crucial to restoring faith in the business world.

The final principal issue said to be putting London's top position in jeopardy is the Treasury's overall attitude to taxation and regulation and a feeling among leading companies that this is becoming less favourable to business.

Concerns over planned changes to capital gains tax are not highlighted in the study, but it is understood to indicate that this, plus other recent reforms, has raised fears that the regime in London is no longer as positive for enterprise as it has been in recent years.

In this case, decisions taken by Chancellor Alistair Darling in next month's Budget will be closely scrutinised and could play a key role in determining London's position when the next world ranking table is compiled in six months.

A source familiar with the study said: "We very much hope that London will retain its number one position, but there are a number of decisions that will be very important in determining how the City is viewed in the future.

"Confidence has been damaged, particularly over 'non-doms' and Northern Rock, and we hope this can be repaired so London can maintain its status."

The new study, due to be published shortly, shows London on top with 795 points - down from 806 last September - and New York only slightly behind on 786, one down on its September score.

Third-placed Hong Kong is nearly 100 points adrift, while the next three places in the top 46 financial centres are taken by Singapore, Zurich and Frankfurt. Factors taken into account include property costs, regulation and taxation, access to customers, the supply of skilled workers, the overall quality of life and government responsiveness to business needs.

Dr Gerard Lyons, Standard Chartered bank chief economist and member of the World Economic Forum's committee on financial centres, said: "Recent problems in tax and regulations could impact on London significantly."