The report, by industry group the Association of Financial Markets in Europe (AFME) and consultants Oliver Wyman, said there were a number of ways policymakers could encourage private investors like insurance companies and asset managers to pump more funds into Europe's struggling economy.

These include promoting private placements, where debt is sold directly to large investors without a market auction, and securitisation, where lenders bundle loans together and sell them on to an outside investors.

Both funding methods are common in the United States, but are less prevalent in Europe, where firms rely much more on bank debt and foreign private placements. This leaves them exposed as banks cut back lending to reduce their risks in the wake of the financial crisis, and also opens them up to currency risks.

However, the report, which AFME said drew on a representative sample of 75 businesses across Europe as well as industry groups and AFME's own bank and investor members, showed private investors have little interest in funding SMEs.

"The majority of non-bank investors interviewed did not have appetite to lend directly to SMEs as it did not fit with their business models," the report said.

"Solutions therefore focus on selectively increasing public sector support where banks do not have the capacity or risk appetite to lend to certain SMEs."

Funding to SMEs has been one of the most critical challenges faced by the European economy, with Britain embarking on the "Funding for Lending" scheme in a bid to tempt banks into lending by offering them cheap funding, and the European Central Bank considering new supports for lending.

AFME, which plans to present its report to policymakers across Europe over the coming months, recommended further support for SMEs from the European Investment Bank.

It also urged the creation of more loan guarantee schemes and national government SME support agencies like Germany's KfW, a state-owned bank that made loans of 73.4 billion euros (62.1 billion pounds) last year.

(Editing by Mark Potter)

By Laura Noonan