The body estimated that around 862 feature films were produced in 25 member states of the European Union, up by 47 from 2005.
Germany was the main gainer - it recorded its highest production level on record and released 174 new features in 2006. This was up 19.1% from 2005. National fiction - films where the majority share of funding comes from one country - and documentary features were the country's key areas of growth. A high number of low-budget films that saw theatrical release also pushed the production growth.
Italian productions were also up last year as the country produced 117 films - the same amount as 2003 - up from 86 in 2005.
Spain recorded its highest production level in 25 years after churning out 150 films in 2006. National films coupled with increased public funding and higher investment in production from broadcasters all accounted for the 5.6% rise.
Austria and Hungary were also up by 10 films each this to 34 and 28 films respectively while provisional figures for Poland saw a rise in the country's national film production.
The UK remained static in comparison the 78 films produced the previous year. But value of investment in production activity in the country increased by 46% to $1.6bn (£842.4m) due to bigger incoming productions.
Production levels in Denmark and France both fell in 2006 due to high levels of activity in 2005. Denmark was down 12 films to 20 and France fell by 23 films to 164.
And value of investment in French production fell by 7.4% in 2006, down to $1.14bn (Eu865m) after dips in low-budget and mid-range film production.
The European Audiovisual Observatory is part of the Council of Europe in Strasbourg.
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