The European Union is now "too big" to sustain its current spending policies, a Lords committee has concluded.

A report from the influential Lords EU select committee said financial reform is needed "as a matter of urgency".

The cross-party committee pointed to common agricultural policy (CAP) spending as one key area for reform.

Their comments also prompted the Conservatives to say it is "absurd" to give the EU more powers over British life.

According to the peers, current plans for agriculture spending should be treated as ceilings not targets.

They said that the burden of CAP financing needs to be shifted back towards the member states.

And structural funds after 2006 should focus on Greece, Portugal and the 10 poorest countries along with the two candidate countries, Bulgaria and Romania.

"The European Union is now getting too big to carry on the spending policies of the past," said Lord Radice, chairman of the inquiry.

"Money spent at EU level must add value and be targeted at areas where it can be most effective.

"The current proposals by the Commission are a missed opportunity and fail to acknowledge the need for change.

"The continued predominance of the common agricultural policy makes no sense.

"Now that the system is based on direct income transfers, and no longer linked to production, the argument for shifting the financing of the CAP back towards member states is strong.

"While the share of agricultural spending remains so high the government is fully justified in defending the British rebate, the case for which arises because of the impact of the common agricultural policy."

Responding to the report, shadow foreign secretary Michael Ancram said Britain had given "vast sums" to the EU.

"Britain has gained considerably from the single market, but it's now clear that much of the money the EU spends could be better spent directly by the member states," he said.

"It's quite absurd for the EU to seek more control over our lives through the EU constitution when it fails to use the powers it already has properly or prudently.

"This report strengthens the Conservative case for powers to be brought back from Brussels."