European Community leaders on Monday night appeared to be inching towards agreement on setting up a high-level study group into improving European monetary co-operation.

West Germany, hosting the EC summit in Hanover, was trying to engineer a compromise bridging strong differences over a common European central bank between, on the one hand, the UK and, on the other, France and Italy backed by the EC Commission.

The monetary debate came at the end of a day devoted largely to taking stock of recent progress achieved under the German presidency towards a unified common market by 1992. Chancellor Helmut Kohl, who received general praise for his handling of the EC presidency in the past six months, reminded his fellow heads of government of the eventual goal of economic and monetary union.

However, optimism about the Community's momentum towards market integration was punctuated by a warning from Mr Kohl that, by removing internal barriers, EC member states might become more vulnerable to crimes such as terrorism and drug trafficking.

Mr Jacques Delors, expected last night to be re-appointed Commission President, also highlighted the need for parallel moves to improve labour conditions for Europe's workforce. He was strongly supported in this by President Mitterrand.

On monetary co-operation, a compromise West German proposal, due to be discussed over dinner last night, was that EC central bank governors and outside experts should examine over the next year possible stepping-stones towards monetary union. UK officials suggested Mrs Margaret Thatcher, Prime Minister, would not oppose such a study, provided its mandate did not centre on investigation into a European central bank, which would imply a loss in sovereignty.

France, although favouring a more full-blooded monetary move towards currency union, apppeared likely to go along with the German suggestion. Mr Mitterrand said it was necessary to develop the European Monetary System towards creation of a central bank.

Mr Hans Dietrich Genscher, the chief proponent in the Bonn Government of a central bank, said a European-level central bank was essential.

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