International education is a $12.5 billion industry, and foreign students' fees account for an average 15 per cent of universities' overall funding, but a higher education experts warns of "informal but real segregation".

Professor Simon Marginson, from the Centre for Higher Education at the University of Melbourne, said local students tended to work off campus and were not active in student life, and international students spent most of their time on campus, generally in the library.

While the atmosphere on campuses generally supported foreign students, Professor Marginson said: "So you've got this odd situation with the local students half-disengaged in a way I've never really seen before. The international student industry runs off the back of a reasonably strong local system which presumes a healthy relationship with the local students … all of that has become the marketing pitch. That's the flashpoint that worries me more than any other - that it could spring back into resentment."

Almost two-thirds of international students are from Asia, and many have no contact with local students. Eric Pang, president of the National Liaision Committee for International Students in Australia, said foreign students were not given a strong welfare system and had to rely on peers for support, yet were accused of failing to integrate. Many had told the committee: "There's not much international students can learn from Australia in terms of culture, or in terms of English. After all, the standard of English of Australian students is not high anyway."

Connie Zhang, a Chinese student studying commerce at the University of Sydney, said last night: "We don't really hang out with the locals. In the first few years I tried to get along with them, but it's kind of difficult. In the third year I just hung out with international students." Her friend Hua Feng said some international students lacked the confidence to speak in English. "It's a totally different world."

The National Union of Students president, Angus McFarland, said vice-chancellors had discussed with him how "cultural cliques" and "religious ghettos" could be overcome. Mixing in the classroom sometimes prompted complaints from both sides: international students complained they were marginalised and domestic students complained poor language skills adversely affected group progress.

He said student associations, underfunded because of voluntary student unionism, could no longer afford to organise sufficient events to encourage mixing.

But universities contacted by the Herald said integration was a priority. The University of Sydney defended its International Student Support Unit, and the University of NSW, where 23 per cent of students are from overseas, pointed to a mandate on integration in laboratories and group work. Professor Marginson said internationalisation was supposed to enrich universities and create cultural and intellectual links, as well as bring in much-needed revenue. But it did not appear to be meeting its stated aim.

" We're certainly not addressing local disengagement, and we're not making use of international students as a bridge to Asia," he said. "We're not helping the local students to become more Asia-focused and become more competent culturally."