The Gulf crisis is blowing Europe's economy off course, Brussels has warned.

As EU member states get ready for next month's summit on economic reform, Romano Prodi has cautioned European capitals that uncertainty over Iraq jeopardises efforts to boost productivity and investment.

"We are still not harnessing the EU's full potential in terms of growth and innovation," the European Commission president said on Wednesday.

"Of course, this phase of the economic cycle is not helping us and nor is the current international political situation," Prodi said.

"On top of the endogenous causes of Europe's economic slowdown are the uncertainties and fears associated with the risk of a conflict and the difficulty of assessing its timing and consequences."

"This continues to have a big impact on the overall strategies and individual decisions of enterprises and investors."

Prodi is concerned that European rifts over Iraq will feed into an economic slowdown.

"There is a prevailing sense of insecurity," he told MEPs.

"Clearly this situation will continue until we are in a new phase that offers brighter prospects, which is vital for new business and investment strategies.

"In the current international context, which is not favourable to an economic recovery, we need to show greater political determination and coherence if we want to achieve targets and fulfil the pledges we gave at EU summits."