Demand for exchange-traded funds (ETFs) has surged in recent years as a result of often anaemic returns from more actively managed funds.

BlackRock said on Tuesday that it would now charge 7 pence a year per 100 pounds invested in its ETF that pays out dividend income, down from 40 pence previously, to make it the cheapest such tracker on the market. Both Vanguard and Deutsche Bank charge 9 pence, it said.

"It really doesn't leave much more room to fall, but I don't think the price war has ended," said Adam Laird, head of ETFs at fund supermarket Hargreaves Lansdown. "In the U.S., you can get mainstream ETFs with fees as low as 0.03 percent."

However, he said he expected rival providers to wait and see if clients switched their money before responding.

The iShares FTSE 100 UCITS ETF (Dist) [ISF] fund was the first ETF to launch on the London Stock Exchange in 2000 and currently holds 3.8 billion pounds of assets under management.

BlackRock, which has more than $1 trillion of assets under management globally, said it would also cut to the same level the cost of its FTSE 100 ETF which reinvests dividend income.

ETFs are equity instruments that allow an investor to trade a range of assets, from a basket of stocks to government debt. As the fund value tracks the value of its contents, it is cheaper than an actively managed fund.

"We believe ETFs have an important role to play post the Retail Distribution Review and want to confirm our commitment to our clients in this market," said Fergus Slinger, head of UK sales at iShares.

By introducing the review in 2012, the British regulator removed an incentive for the country's many independent financial advisors to funnel retail investor cash to commission-paying active funds rather than the cheaper ETFs.

Demand for ETFs has grown since, also fuelled by the government's decision last year to increase the amount of money investors can save tax-free, and could get another fillip when new pension investment freedoms go live in April.

"In big markets like the UK FTSE 100, prices have fallen dramatically," said Hargreaves Lansdown's Laird.

"Where I think we're likely to see the next round of moves, though, is in some of the niche markets, such as emerging markets, where fees tend to be higher, at around 0.4 percent and 0.6 percent."

(Editing by David Evans and Pravin Char)

By Simon Jessop