Small firms in the UK risk losing business and falling behind their European counterparts because of a failure fully to understand the benefits of the internet, a new report has warned.

The Institute of Directors (IoD) and broadband provider UK Online have produced a guide entitled Your Business and the Internet designed to help SMEs better understand the power of the web.

The guide offers a step-by-step introduction to doing business online, offering explanations and examples of internet-related functions such as setting up a website and making VoIP phone calls and conferences.

"Being online is fundamental as the internet has placed almost unlimited information and choice in the hands of the consumer," said Chris Stening, managing director of UK Online.

"Not having a website, even a basic site which describes your business and provides contact details, is a serious omission as the first thing people do now is compare services and products online before buying.

"Despite this, our research shows that as many as two thirds of small businesses with fewer than 10 employees still operate with no internet connection."

Recent figures from research organisation Eurostat suggest that 86 per cent of small businesses in France have broadband connections, 87 per cent in Spain and 89 per cent in Finland and Sweden, but only 77 per cent in the UK.

This is despite predictions from Forrester Research that 32 million UK consumers will be shopping online by 2011, spending almost £53bn and making the UK the most lucrative e-commerce market in Europe.

"Smaller businesses, which make up the vast bulk of UK firms and indeed our own membership, are not maximising their opportunities," said IoD director general Miles Templeman.

"Much of the current intelligence about the internet focuses on the needs of consumers, but information for businesses tends to be at a complex, high-end technical and strategic level.

"Smaller companies need straightforward advice about what they can sensibly achieve with the resources to hand."

The warning is backed up by the recent State of the Small Business Nation 2007 report from BT Business as part of Small Business Week 2007.

"The world of British business is changing, and hundreds of thousands of new businesses are being started every year," said Bill Murphy, managing director of BT Business.

"However, our report demonstrates that there are many areas of concern to small businesses and it is critical that we provide more support and help these companies to thrive and grow."