London is now the world’s second most expensive city and the most expensive in Europe, says a new survey.

The cost of living is higher only in the Japanese capital, Tokyo, according to research by Mercer Human Resource Consulting.

London has moved up five places in the last year – pushed up by the high prices of accommodation and transport and the appreciation of the pound against the dollar.

Moscow, which previously held second position, now comes in third. Of other European cities, Geneva is the next most expensive at sixth, Copenhagen is at eighth, Zurich at ninth, Milan thirteenth, Dublin fourteenth, Oslo fifteenth and Paris seventeenth.

New York, the most expensive US city, ranks twelfth.

The cheapest cities in Europe are Bucharest in Romania and Limassol in Cyprus – however, both countries entered the EU this year and so increased investment as a result could see them moving up the ranks this time next year.

Stephen Dowd, chief executive of the British Incoming Tour Operators Association, (BITOA), said: “I’m not surprised London is the most expensive destination in Europe and it is something that we need to address.

“We are lobbying the government to reduce the tax burden on tourism businesses – currently 20 per cent of tourism revenue goes to the Chancellor and we believe this is stifling growth. London is so expensive because the prices reflect the fact that the cost of operation in London is so much higher than other countries.”

A spokesperson for tourism body, Visit London, however, said the results would not affect visitors to the capital.

“Another survey earlier in the year showed London falling out of the top ten most expensive cities to visit, so it all depends on what you’re comparing,” he said. “Massive strides have been made in recent years to promote the great value you can find in the capital and it’s not too hard to find some great deals.

“We have 70 free national museums and galleries whereas places like Paris charge virtually every time you step in through the door. Even travel works out cost-effectively. Once you’ve bought a daily or weekly travelcard, the unit price of a fare can end up much cheaper than other cities.

"Budget accommodation is growing rapidly in London and you can now find decent quality hotel rooms for as little as £25 a night.

“We don’t see this as anything new. In our experience, price is only one factor in deciding to visit somewhere like London. If there’s a compelling reason to go, then people will work out their own budget.

"London has a distinct advantage in being one of the biggest transport hubs in the world – budget airlines have helped to bring lots more people from near Europe.

“We’re expecting 2004 to be an excellent year for tourism in London and the early signs are very encouraging.”

The Mercer survey, conducted in March 2004, covers 144 cities and measures the comparative cost of over 200 items, including housing, food, clothing and household goods as well as transportation and entertainment.