THE European Union's financial watchdog has warned that loopholes in the complex system for paying Euro MPs' allowances are breaking its own financial rules and are an invitation to fraud, writes Rory Watson, European Correspondent.

The criticism is contained in a confidential report from the EU's Court of Auditors which spent several months last year investigating the system of daily travel and staff allowances enjoyed by the 626 MEPs. The auditors have not listed individual examples of fraud, but have left the European Parliament in no doubt that they believe there is considerable room for improvement.

While accepting some tightening-up has taken place, the investigators criticised advances to members for private travel. They also questioned the practice of fixed lump sums of allowances which ''are not linked closely enough to actual situations or costs'' and maintained that the present system involved high management costs.

Stung by public criticism last year, the Parliament has already begun to close loopholes. To prevent MEPs claiming their daily allowance of #157 and then taking no further part in Parliamentary business, members must now participate in the lunchtime votes during Strasbourg and Brussels sessions.