The body said it recognised the environmental benefits of recycling waste paper but was concerned that state funding for WRAP would distort the recycling market.

Under WRAP, the Government gives grants to UK paper mills to help finance increases in capacity for paper made from using waste paper. The scheme's budget varies from 6m to 20m per year.

The Commission argued that waste paper was "commonly used as the cheapest raw material in the paper industry", before any Government intervention.

"Given the expected increase in the collection of waste paper and the growing interest of the industry in this type of waste paper, the Commission doubts the necessity of the aid," it said in a statement.

Competition commissioner Neelie Kroes said: "We must ensure that aid proposed on environmental grounds genuinely pursues environmental objectives."

WRAP director of materials Liz Goodwin said that the investigation had not come as a surprise to the organisation. "As it's a state-aid project and a sensitive area, this was expected," she said.

Brussels also scrutinised WRAP funding for a recycled newsprint project at UPM's Shotton mill, in Flintshire,  Wales, in 2002.