The number of young Scots applying to universities has fallen by more than 1000 over the past five years, prompting fears for the future of the sector and the country's knowledge economy.

Official figures show that 24,078 Scottish school-leavers have applied to enter higher education so far this year, compared with 25,116 at the same time in 2003 - a drop of more than 4%.

Although the decline has been offset by a 10% increase in students from European Union countries and a 1.7% rise in students from England, overall applications to Scottish universities are down by 1% on last year.

The fall in Scottish applicants is partly due to the declining school population, which has seen secondary pupil numbers drop from 318,427 in 2003 to 312,979 in 2006.

However, there are also fears that prospective students are being put off by the fear of student debt while others suggest the expansion in higher and further education in the late 1990s went too far and that numbers are now returning to a natural level.

Last night, CBI Scotland warned that a long-term decline in the number of graduates would have serious implications, but said it was "not time to panic".

Alan Mitchell, assistant director of CBI Scotland, said: "Decline of this magnitude is not catastrophic.

"We have a booming economy and businesses are looking to bring in workers which has meant that wages are competitive and, in that climate, it is not surprising that people will make choices that they see as being financially beneficial.

"However, if that decline continues, a few years down the road we would be in serious trouble because the skills needs of employers will rise."

Universities Scotland, which represents university principals, warned policymakers that, if the trend continued, the university sector could slip into decline.

"If we see continued decline, it will mean that fewer Scots are going to university at a time when knowledge and skills are the most important currency in the economy, which is worrying.

"We will continue to monitor the numbers of applicants and work with the new administration to make sure Scotland has the skills the future economy will need."

Fiona Hyslop, SNP education spokeswoman, said the decline was a result of student debt which created a powerful disincentive for thousands of potential students.

"The decline in the population may account for some of this, but fear of debt still puts off too many of our brightest pupils from applying to university," she said.

University lecturers also backed concerns over debts. Alastair Hunter, president of UCU Scotland, said a 7% rise in the number of applicants over the age of 21 indicated that potential students were delaying entry to avoid debt.

Murdo Fraser, deputy leader of the Scottish Conservatives, said: "If it is the case that young people are being put off because of the fear of student debt that would be worrying, but there have been concerns expressed in the past that we may have too high a percentage of people going to university in the first place.

"If this is an example of people more suited to vocational education or employment following those options then it is not necessarily a bad thing for the wider economy."