Boeing, the aerospace company, has flown an aircraft powered by a hydrogen fuel cell for the first time in what could be a significant advance towards environmentally-friendly aviation.

The company's Phantom Works research unit said that it had flown a small propeller aircraft for 20 minutes under hydrogen power, which produces only water as a by-product.

Airlines and aircraft manufacturers are trying to develop alternatives to jet fuel to reduce their carbon dioxide emissions. Aviation accounts for 2 to 3 per cent of the world's greenhouse gas emissions but the industry is growing rapidly and needs to limit future damage to the environment.

An Airbus test plane made the first biofuel flight in February, powered by organic plant matter, and this was followed by a Virgin Atlantic-Boeing experiment using babassu oil and coconut oil.

There are financial incentives for airlines to find an alternative to jet fuel as the price of oil has risen dramatically in the past two years. Airlines will also become part of the European carbon trading scheme in 2011, which will penalise companies for emitting large quantities of CO2.

John Tracy, Boeing's chief technology officer, said: “For the first time in the history of aviation, we have flown a manned airplane that was powered by a hydrogen battery. Boeing recognizes that pollution represents a serious environmental challenge."

Hydrogen cell batteries are beginning to be used in some cars but are still very expensive. They convert a hydrogen fuel source into electricity using oxygen as the catalyst. This produces water as the only emission.

Boeing said that hydrogen fuel cells were unlikely to power the engines of large passenger jets but could be used as backup or auxiliary power units onboard.

Virgin Atlantic flew a Boeing 747 from London to Amsterdam in February with one engine powered by biofuel. Sir Richard Branson has dedicated all the profits from his transport businesses for 10 years to developing alternative fuel sources and the company is looking at numerous options.

Sir Richard told The Times recently that he expected algae to be the next biofuel tested by Virgin Atlantic and he was in discussions with sewage works about growing a sufficiently large crop to use the new fuel commercially.

Continental Airlines hopes to become the first US-based carrier to fly a biofuel plane next year.

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