DRUGS manufacturer GlaxoSmithKline has warned European governments to cease hard-hitting price cuts on medicines or face stunting the research and development of new drugs on the continent.

The group warned that austerity drives across Europe have seen medicine prices slashed by more than seven per cent as it announced moves to overhaul its European business to weather difficult trading conditions.

It said it was unclear if there would be any impact on jobs and would give further details of the review before the end of the year.

However, a spokesman for the company said the operations at Barnard Castle, County Durham, were a different part of the business, and the company was expecting to have a net increase in UK jobs over the next two years.

The firm is headquartered in this country and employs around 15,000 people nationwide.

The group has around 23,000 staff across Europe, excluding the UK.

Third quarter sales slumped nine per cent in Europe, largely as a result of government cut backs, which dragged on the wider group performance, with overall sales down by five per cent to £6.5bn.

Glaxo said that while it hoped better performances in emerging markets and Asia would see a return to sales growth in the fourth quarter, the worse-than-expected conditions in Europe will mean full year sales are likely to remain flat against previous forecasts for an increase of around two per cent.

Sir Andrew Witty, chief executive of Glaxo, said: "There's a risk that these aggressive price reductions are going to undermine the incentive for innovation in Europe.

"It's not reasonable for governments to believe they can continue to make these sorts of price reductions and delay new medicines without having unintended consequences."

Prices have been worst affected in Greece and Germany, but Glaxo said governments cross-reference their prices across Europe, which means one country can influence the whole continent.

It added that systems for getting new medicines on to the market were also impacting business, in particular in the UK.

Glaxo posted a 13 per cent fall in underlying operating profits to £2bn in the third quarter.