The UK could lose billions of pounds and thousands of jobs in the solar industry if the EU imposes tariffs on cheap imported panels from China, a report has claimed.

The European commission is investigating if solar panels coming into Europe from China are being sold below market value – known as "dumping" – and benefiting from unfair Chinese government subsidies.

The move by the commission, instigated last year, is the largest of its kind, with solar panels and key components worth more than £18bn exported from China to the EU in 2011.

It followed complaints from European solar manufacturers and could lead to anti-dumping and anti-subsidy duties being imposed on Chinese-made panels to stop the cheap imports harming Europe's domestic industry.

But a report published on Tuesday suggests imposing any level of tariff would hit the EU economy and jobs would be lost, as the move would push up photovoltaic panel prices and reduce the installation of the green electricity technology.

In the UK, which sources the vast majority of panels from China, the measure could cut the industry by up to 80%, costing the economy £3.46bn and 38,600 jobs over a three-year period if a duty of 60% were imposed on solar panel imports.

If a lower duty rate of 20% were put in place, it could still cost the UK £1.6bn and 19,300 jobs, the report by European thinktank Prognos said.

Across Europe, up to 242,000 jobs could be lost if 60% duty were imposed on the imported panels, at a cost of more than £27bn over three years, the study for the Alliance for Solar Energy coalition of solar companies estimated.

Employment and revenue would be hit by the rising cost of the panels, which would reduce the number of installations and demand for the other components of solar systems.

There would also be a decrease in exports of raw materials and machinery to China from the EU, and other segments of the bloc's economy such as engineering and other services would be hit.

EU producers could increase production, but the extra jobs and revenue that would generate would be dwarfed by the losses as installation dips.

The UK's burgeoning solar industry has already been hit by reductions in the subsidies paid for generating electricity from the renewable energy source.

Responding to the report, Gabriel Wondrausch, managing director of Exeter-based SunGift Solar, said: "Any tariffs that force a price increase means our customers will not get the rate of return they require to make solar PV an attractive investment: if solar products become unaffordable the UK industry will suffer, jobs will be lost, and PV installation companies will undoubtedly fold."

A spokeswoman for the European commission said: "We have only just started the proceedings and so the question of imposing duties will not arise for some time.

"A full and rigorous investigation, in which all interested parties will participate, will ultimately determine whether there is dumping causing injury to the EU industry.

"One key element in such investigations is to check that any anti-dumping measures are not against the community interest.

"This means that the overall economic interests in the EU are taken into account - including the domestic industry producing the product concerned, importers, community industries that use the imported product and the end consumer of the product."

Duties could only be imposed if there was clear and sufficient evidence of harm to a significant share of the EU industry in the sector, and the outcome of the investigation was still open, she added.