A report from the International Education Association of Australia (IEAA) found that the amount spent on fees, goods and services by foreign students had dropped to A$15.8 billion in 2010-11 from A$18.5 billion the previous year.

According to the figures, taken from Australian Bureau of Statistics data, the states of Victoria and New South Wales - which together have just under half of the country's universities - each lost more than A$1 billion, accounting for most of the overall fall.

Australia has seen overseas demand hit hard in the past two years thanks to factors including tight student-visa rules, a strong currency and attacks on Indian students in major cities such as Melbourne.

The federal government is now trying to repair the damage following the landmark Knight review of visa policy by making it easier for institutions to recruit from abroad, as well as boosting post-study work opportunities for overseas students.

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Education remains the country's third most-lucrative export behind coal and iron, while in Victoria it remains the most lucrative, bringing in around twice as much revenue as the second-largest industry, tourism, despite a fall of almost 20 per cent.

Phil Honeywood, executive director of the IEAA, said the outlook for 2012 was gloomy and predicted "more pain before the international education industry turns around".

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He said the continuing strength of the Australian dollar and high accommodation costs would work against a recovery, as well as the fact that competitors such as Canada, the US and New Zealand were "doing their best" to lure international students.

simon.baker@tsleducation.com.