One million new homes should be built in Oxford to help the city become an economic power-house of the 21st century, a thinktank report says today.

The Policy Exchange thinktank - which has close links to David Cameron's Conservative Party - calls for the Green Belt to be torn up and Oxford expanded dramatically, in the same way Liverpool and Manchester mushroomed in the 19th century.

Its report, Cities Unlimited, argues that attempts to regenerate northern industrial cities like Liverpool or Sunderland are doomed to failure because the decline of industries such as shipping have placed them beyond revival.

Instead, according to Policy Exchange, millions of their residents should move to the South East and Government policy should be focused on building on areas that already show potential for growth - like Oxford, Cambridge and London.

Oxford was ideal for major expansion because of its location in South East England, the engine of the UK's economy; because cities based on highly skilled workers were the most dynamic and Oxford was home to one of Britain's leading research universities; and because it was sited near a major airport (Heathrow) as well as London.

The report concluded that all of the three million new homes planned by the Government for England should be shared equally between Oxford, London and Cambridge.

Restrictions on house-building in the South East should be lifted to lower house prices and stop people on low incomes being trapped in less prosperous parts of the country, it said.

The optimal size of each city could exceed one million people, perhaps by a considerable margin.

The report said it was likely that an expanded Oxford would be richer than everywhere else in Britain outside the capital.

The authors included Tim Leunig, a lecturer in economic history at the London School of Economics, who said: "No doubt some people will claim that these proposals are unworkable, unreasonable and perhaps plain barmy.

"But the issue is clear - current regeneration policies are failing the very people they are supposed to be helping and there is no evidence that the trend will be reversed without radical changes."

The Tories this morning distanced themselves from the report. Chris Grayling, the shadow minister for Liverpool, said it did not reflect party policy and the Conservatives did not agree with its conclusions.