Germany scored a 15% rise in inward investment and attracted more investors than UK from Brazil, Russia, India and China

Britain is on the brink of losing out to Germany as Europe's number one destination for foreign direct investment after the financial crisis took its toll of projects in the City of London.

The annual snapshot by overseas investors from Ernst & Young found that the UK's heavy reliance on investment by Wall Street firms has led to a drying up of spending.

Britain saw a 7% drop in inward investment in 2011, with the financial services sector seeing a 15% drop. Germany, by contrast, saw inward investment rise by 15% and was twice as successful as the UK in attracting investors from the Bric countries – Brazil, Russia, India and China.

With Germany now only 2% behind the UK in the number of inward investment projects in 2011, Steve Varley, Ernst & Young UK & Ireland managing partner, said: "The ability to win investment has been a crucial source of pride, job-creation and growth over many years and is now more important than ever. These findings must act as a wake-up call to prevent the UK losing its lead in foreign direct investment."

The report demonstrated how dependent the UK was on a small number of countries, especially the US, and sectors, such as financial services, for the majority of its projects.

Varley said: "The UK needs to keep existing FDI sources and investors happy, while also seeking out new markets and opportunities."

The study found that London is by far the most popular UK destination for investors, accounting for half of all projects in 2011. Other regions saw big falls in FDI, with Wales particularly hard hit.

"While there is no clear-cut cause-and-effect relationship, the closure of English Regional Development Agencies was announced in 2010, and it remains to be seen how this affects the UK's ability to reinvigorate FDI at a local level", Ernst & Young said.

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