Car prices are converging across the European Union, but there are still huge differences between countries, according to a new report by the European Commission.

Cars are cheapest in Poland and most expensive in Austria and Germany, the report, based on May 1, 2004 figures, says.

The Commission found that prices were gradually flattening out, although differences of more than 20% were common, particularly for luxury models.

Mario Monti, EU competition commissioner, says: '' The slight downtrend in car prices in some of the high volume countries is a hopeful sign that competition is gaining a foothold in the car sector.”

In its first survey of car prices since the union expanded to 25 members in May, the commission found the average price difference across the Union had fallen from 4.9% to 4.4% between April 2003 and 2004.

Prices in Poland were 9% lower than in Finland, the least expensive market among the EU's old 15 members.

Finland prices are some 10% lower on average than Germany.

The report, which analysed sales of 90 models, concluded that Fiat Pandas sold in Poland were the cheapest cars across the EU.

Prices rose 0.8% across the 12 Euro zone nations over the period, remaining unchanged in Britain.

The EC is to take legal action against the PSA Group. It is accusing the company of denying bonuses to dealers in Germany and Netherlands who sold cars to foreigners. The carmaker has two months to respond.