Advertising budgets in the UK were at their strongest since 2004 in the first quarter, research has shown.

And 2007 could be the best year since 2000 for advertisers, as companies look to market new products and business expansions.

One in four companies said they increased marketing budgets, representing a "marked improvement" to advertisers since budget cuts in 2005 and 2006, the Institute of Practitioners in Advertising said.

The Bellwether Report, by the Institute, predicts further growth in budgets this year. The report said the increase was pushed by the growth in internet advertising, which had grown strongly over the first quarter.

Chris Williams, the author of the report, said: "Surging corporate profits and above-trend economic growth has led to a further strengthening of marketing spend, with companies investing in additional marketing to support business expansion plans and new products.

"The planned increase in spend for the 2007 accounting year represents the most upbeat start to a year that we've seen since 2000."

Companies' marketing budgets had been hampered in the last few years by a persistent downturn in the country's economy, according to the report.

But 54 per cent of businesses had set higher marketing budgets for 2007 than the amount they spent in 2006, it added.

And Internet marketing budgets increased by more than any other sector, making up an average of 19 per cent of the spend of companies reporting an increase in their budgets.

The internet now accounts for about #2 billion of marketing spending by companies every year.

Chris Lovell, managing director at Birmingham-based advertising agency Advertising Synergy, said the findings of the report reflected what he had seen in the market.

He said: "There is certainly a lot more optimism, and all our clients are going into this year showing more interest in their budgets.

"The greatest growth we have seen is in the demand for digital online marketing, turning printed material into online versions.

"Our own particular experience is that we've seen an increase in demand for email marketing."

He said digital marketing was attractive to companies looking to be more "green", by reducing the amount of paper used in traditional marketing.

But he added that most of the increased digital marketing spending he had seen was "additional" to traditional marketing spend, not replacing it.

Martin Sorrell, chief executive of advertising agency collective WPP Group, said the report showed there had been a recovery against "admittedly weak comparables" led by an expansion in marketing through direct online and interactive methods.

But he said the amount of online marketing spending was still lagging behind the meteoric rise in the numbers of consumers using the internet.

And Numis analyst Lorna Tilbian also warned that the three increases in interest rates since August 2006 could hold back the recovery in the advertising market by making companies more reluctant to feed money into the market.