Britain needs to build a four-runway airport in west London or north of the city if it wants to compete with other European hubs, according to a report by UK think tank Policy Exchange.

Construction of a four runway airport close to the current Heathrow hub in west London is the best option for the UK, the study said.

A four-runway airport in Luton, north of London, is the next-best solution to the capacity crunch at UK airports.

The report, written by Tim Leunig, chief economist at the liberal think tank CentreForum, did not rule out the idea of a third runway at Heathrow. But it said plans for an airport in London's Thames Estuary - backed by London Mayor Boris Johnson and architect Lord Foster - were not practical.

Policy Exchange said an estuary airport would be too difficult to get to for too many people and would present greater construction and environmental challenges than expansion at Heathrow.

"A four-runway airport would be straightforward to construct and relatively low cost by the standards of hub airports. It causes the lowest level of disruption to the wider economy of any likely airport expansion scenario," Leunig said.

He added that Heathrow could also be expanded in such a way that it cements itself as Europe's number one hub while significantly reducing noise over west London. This could be achieved by a complete ban on the noisiest of aircraft at all times, a complete ban on flights between 11pm at night and 6.15am in the morning as well as the use of steeper landing angles to help reduce noise, the report said.

Heathrow is operating close to full capacity after Britain's government blocked development of a third runway when it came to power in 2010 as further expansion of the west London site would mean a huge increase in the number of planes flying directly over the capital.

A commission chaired by former Financial Services Authority head Howard Davies to analyse ways to expand airport capacity in southeast England will report in the summer of 2015 after releasing an interim report next year, Patrick McLoughlin said last month.

Ferrovial's BAA has seen traffic between Heathrow and emerging markets rise in recent years and believes it is now falling behind rival European airports in Frankfurt, Paris and Amsterdam in the battle for these lucrative routes because of constraints on growth.