The study - compiled by Eurostat - found that the UK had slipped two places to sixth in 2011.
The country fell behind Germany and Austria, the report found, largely as a result of the squeeze on consumer spending which was brought about by wage growth failing to keep pace with rising prices.
Living costs in the UK were found to be 3% higher than the EU average.
The country was already behind Luxembourg, Norway and Switzerland in the table but remained well above the EU average for living standards despite the decline.
The UK was also found to be the 14th most expensive country in Europe - down from 15th - with Switzerland replacing Norway at the top.
The living standards measure - described in the study as 'actual individual consumption' - takes in all goods and services that a household consumes, including benefits in kind such as health and education.
The drop came as prices in the UK rose to 3% above the EU average in 2011, from 2% in 2010, as inflation in Britain rose to a peak of 5% in September of that year.
At the end of 2011, Bank of England governor Sir Mervyn King said households were suffering from the biggest squeeze on living standards since the 1930s.
He has since said that that squeeze is easing but official figures have recently cast doubt on that expectation in the short term as wage growth was found to have slowed to an annual rate of 1.8% amid a rise in the rate of anual inflation to 2.7% in October.
Looking ahead, the Bank of England still expects inflation to fall, coming back towards the 2% target late next year.
Responding to the report's findings, the TUC General Secretary Brendan Barber said: "Today's plummet down the European living standards league table will come as no surprise to the millions of ordinary families struggling to make ends meet across austerity Britain.
"With wages failing to keep pace with rising prices, and many households soon to take an additional hit as tax credits and benefits are either frozen or taken away, people are understandably being careful with what little money they have and are reining in their spending.
"Families are having to watch every penny so high street spending is down and that's hitting shops and businesses. We need people to spend and businesses to invest and so expand - only then will the economy get back to growth.
"For all the Chancellor's talk of a 'global race', when it comes to living standards the UK is falling further behind.
"Instead of making families bear the brunt of its ill-thought out economic policies, the government should concentrate on boosting consumer and business confidence by putting jobs and growth first."