A CONSERVATIVE minister has warned that the UK would be "significantly worse off" - at least in the short and medium-term -outside the European Union.

His comments come just hours after the Chancellor suggested that the organisation was holding the economy back.

In a significant hardening of the Tories' position, George Osborne set out his view that the EU was no longer "working" economically for the UK.

But Desmond Swayne, a noted eurosceptic who has previously described Brussels as an "alien and evil empire", warned fellow Tories not to expect life outside the EU to be some kind of "El Dorado".

The International Development Minister, a former aide to David Cameron, suggested that leaving the union would be a "painful process".

He said: "It might well in the long run be more competitive, more prosperous, but we might in the short-medium term be significantly worse off and we'd certainly lose influence."

He added that he supported Mr Cameron's attempts to secure EU reform, amid growing ­pressure on the Tories from the eurosceptic Ukip. "The Prime Minister believes he can make arrangements on our continued membership of the EU palatable to me, and I want to give him his head," he said. The Conservatives are expected to lose a second Westminster by-election in as many months to Ukip on November 20. The contest comes at a difficult time for the party over Europe.

Last week ministers were surprised when the UK was presented with a shock bill for an extra £1.7 billion from Brussels.

Earlier this week, Mr Cameron came under more pressure when his strongest ally in Europe, Angela Merkel, reportedly ruled out his plans for reforming the free movement of labour.

The Prime Minister insists restrictions are needed in order to reduce migration from the EU to the UK.

His woes were increased by new economic forecasts yesterday downgrading the prospects for a number of European economies.