Manchester City's £400m sponsorship deal with Etihad has been labelled "an improper transaction" by a leading European body in a report that has warned Uefa to ensure that clubs cannot find ways of getting round the Financial Fair Play rules.

A committee of the Council of Europe wants clubs to be barred from agreeing sponsorship deals with companies that have links with their owners. FFP is to be enforced from 2013-14, with clubs only allowed to spend what they earn. They are expected to break even over a three-year period, starting from 2011-12, and are allowed an "acceptable deviation" of €45m (£37.6m) over the first two years.

The report, compiled by the Council's Committee on Culture, Science, Education and Media, highlights City as an example of a deal that Uefa have to keep a close eye on.

The report said: "Clubs will no doubt try to supplement their income if possible. They could for example call on sponsors to invest more so as to reduce or eliminate their deficits. Care will have to be taken to prevent any circumvention of the financial fair play rules in this way.

"A case in point is Manchester City, which has entered into a contract estimated at £400m with the airline Etihad. Etihad belongs to the Abu Dhabi royal family, and the Abu Dhabi United Group, which is led by Suleiman Al-Fahim, owns Manchester City.

"In order to avoid improper transactions of this kind, Uefa should prohibit clubs from sponsoring themselves or using associated bodies to do so. There is also a need to monitor the 'purchases' of sponsors, who should not overpay for the rights they acquire."

City last night rejected the report's description of the deal. "For the sake of credibility, the Council would do well to seek primary evidence through engaging with organisations rather than taking a position based on speculation," said a club spokesperson.

City, who have sent officials to Uefa's HQ in Nyon for consultations, believe that the Etihad deal is within the FFP rules. Paris St Germain have a similar deal with Qatar.

City's losses in the last two years have been £195m and £121m. Uefa have the option of banning clubs from European competition should they fail to meet FFP requirements, but it is likely that fines would be levied first.

The report also said Real Madrid's deal to sell their training ground to city authorities for €400m in effect constituted "state aid" and suggested such a practice should be banned.

As a watchdog separated from the European Union, the Council of Europe has no powers of enforcement.

The committee issued a draft resolution calling for Sepp Blatter's unopposed re-election as Fifa president last year to be the subject of an internal investigation into whether he unfairly exploited his position.