Environmental pollution could bring down international finance houses and global markets, as well as damaging human health, according to economists, business experts and legal advisers.

Laws that the European Union could introduce to protect the environment from industrial contamination may cripple big banks and handicap countries hoping to attract investment from multinational companies.

Rules already operating in the United States allow the Government to sue banks or investment companies that have backed firms responsible for pollution. But they ignore the fact that many major financial institutions are teetering on the edge of insolvency, and such legal action could finish them, according to researchers at the University of Southampton.

Companies and banks may also be reluctant to invest in countries that adopt this "legal scatter-gun" approach to finding funds to pay for cleaning up land polluted by industry.

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The laws could also fail to protect the environment from the kinds of pollution levels that some scientists believe to be dangerous.

There is evidence that Britain has a poor record on protecting the countryside from industrial polluters. Last year's Environment Act left many key questions over the requirements of a new "green" code unanswered.

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Tim Jewell, a lecturer in environmental law and member of a team assessing the impact of such legislation, says there are still no clear guidelines on how polluted land should be cleaned up, how clean it should be, or who should be liable for the cost of the work.

"There is an awful lot of new environmental law, but the implications in terms of liability have not been explored particularly closely. We want to examine the present position and look at how forms of legal liability might be attached to this sort of problem," he said.

But one consideration in the investigation will have to be the potential impact of laws like those adopted in the US and under consideration by the EU on vulnerable financial institutions which invest in industrial development, says George McKenzie, a reader in finance and project team member.

"Many people have assumed it is reasonable to make investors liable because it is assumed they have 'deep pockets'. That is worrying because some of them are already on the verge of insolvency. The assumption that these institutions carry out risk management assessments on a case by case basis is also incorrect," he said.

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The issues addressed by the project, which has a Pounds 100,000 award from the Economic and Social Research Council, are important enough to have attracted the interest of the World Bank. Finance and business leaders are worried that ill-thought out legislation could let down industry as well as green campaigners, Dr McKenzie said.

"Decisions about legislation could affect global markets if they made investment in some countries much riskier than in others," he added.