The UK lost its status as one of the world leaders in producing graduates, according to a league table published today.
The country's rate of students gaining degrees plummeted from the top four among developed nations to 15th, trailing the likes of Poland, Iceland, Portugal and Slovakia.
A union said the results, compiled by the Organisation for Economic Co-operation and Development (OECD), showed the UK went "from a major player to a relegation candidate".
The UK plunged down the table despite increasing education funding at degree level, the OECD's Education at a Glance 2010 report said.
Competition is intensifying among countries as Governments realise the importance of world-class quality in their education systems to ensure long-term economic growth, according to the OECD report.
Announcing results in London, Andreas Schleicher, head of the OECD's indicators and analysis division, said Finland, Canada and Japan were now major players in higher education.
"For many years the UK was very much at the forefront," he added. "But now you do not see that competitive advantage."
The University and College Union (UCU) warned the UK is in danger of being left behind, with results showing it was now below the OECD average for graduation rates.
Sally Hunt, UCU general secretary, said: "Today's report shows a worrying decline in the UK's standing in the world of education.
"We have plummeted down the graduate league table, going from a major player to a relegation candidate in less than a decade. The coalition Government's refusal to fund sufficient university places this summer will come back to haunt us.
"Other countries are preparing to play a leading role in the new knowledge economy while we risk consigning a generation to the scrapheap of inactivity and being left behind."
The report said that "labour market demand for highly qualified workers has grown significantly" and countries with high graduation rates at the tertiary level are "most likely to develop or maintain a highly skilled labour force".
Angel Gurria, OECD secretary general, said: "Good education increases employability. In countries hit early by the recession, people with low levels of education had more difficulties finding and keeping a job."
In 2000, the UK (37%) was nine percentage points higher than the OECD average (28%) - yet in 2008 the UK (35%) was three percentage points below the OECD average (38%).
Dr Wendy Piatt, of the Russell Group of research-intensive universities, said the UK "risks jeopardising the competitive advantage which has made its universities the envy of the world".
She added: "While our universities are bracing themselves for a period of austerity and uncertainty, other nations are rightly pumping billions of dollars into their institutions at this key time before the world economy picks up."
If universities are hit by more cuts, "we could well be relegated to a lower division of higher education quality from which we would struggle ever to recover.
"In a tight fiscal climate, maintaining the quality of the student experience must be a greater priority than expanding the number of places. We must not try to spread limited funds too thinly otherwise we risk short-changing students, employers and, ultimately, the country as a whole which relies on universities to create the growing, knowledge-based economy we need to recover from the recession."
Here are the top 15 in the developed world, according to the OECD:
1. Finland (63%)
-2. Iceland (57%)
-2. Slovakia (57%)
4. Poland (50%)
5. New Zealand (48%)
6. Denmark (47%)
7. Ireland (46%)
8. Portugal (45%)
-9. Netherlands (41%)
-9. Norway (41%)
11. Sweden (40%)
12. United States (37%)
-13. Czech Republic (36%)
-13. Israel (36%)
15. United Kingdom (35%)
The percentages were based on the average age at which graduation usually occurs in each country