The European Commission is examining the legal basis for 1970s-style exchange controls to stop the euro surging to destructive levels.

A team working for Pedro Solbes, economics commissioner, claims Brussels may lawfully impose "quantitative restrictions" on capital inflows, clearing the way for a crisis response if the dollar continues to fall.

The document, drafted last month on the orders of Mr Solbes's director-general, Klaus Regling, concludes: "Should extremely disturbing capital movements endanger the operation of economic and monetary union, Article 59 EC provides for the possibility to adopt restrictive measures for a period not exceeding six months."

Any decision would be taken by EU finance ministers under qualified majority voting, leaving Britain with no veto.

The move came as the euro hit highs against the US dollar, touching 1.2125 yesterday before closing at 1.2109. It has gained 42pc in less than two years.

The euro-zone has borne the brunt of the global realignment. The Chinese yuan is pegged to the dollar, while Japan has capped the yen by buying US bonds.

Industry leaders in Germany and France say the euro has crossed the "pain threshold" and risks aborting the euro-zone's fragile recovery. The latest survey data shows a renewed fall in confidence among French consumers and German retailers.

Jean-Philippe Cotis, the OECD's chief economist, said further appreciation posed a "great danger" to the euro-zone.

It is widely assumed EU law guarantees the free movement of capital but, after combing through the treaties and court judgments, EU experts have concluded that this "absolute freedom" can be limited in an emergency.

"Among the actions that can be undertaken when a member state experiences serious balance of payments difficulties, Articles 119 and 120 EC provide for the possibility to reintroduce 'quantitative protective measures' against third countries."

The document is is annexed to the Commission's 2003 EU Economic Review, released quietly last week. Some officials in Brussels, Berlin, and Paris believe the Bush administration is engaged in a "beggar-thy-neighbour" currency war.

Strong factions within the French and German governments want the European Central Bank to counter the "easy credit" policy of the US Federal Reserve with aggressive monetary expansion in Europe.

Faced with stubborn resistance from the anti-inflation hawks at the ECB, they are instead eyeing exchange rate policy as a means of imposing their will.

While capital controls are viewed as the "nuclear option" if all else fails, the collapsing dollar is rapidly bringing the issue to a head. A senior EU official told the Daily Telegraph that an exchange rate of 1.35 against the dollar is a likely trigger.

It is unclear where such a decision would leave Britain. While treaty law does not allow controls between EU states, any restrictions on dollar inflows into the euro-zone would create a legal nightmare and play havoc with the City of London.

Oliver Letwin, the shadow chancellor, said: "It is utterly risible for the EU to take a step back in time and pretend it can effectively control global capital markets."

The European Commission said there were no plans to impose exchange controls. "It's utter rubbish. The fact that we have carried out a study doesn't mean we are going to do it," said a spokesman.