By Robin Emmott and Kylie MacLellan
BRUSSELS/LONDON (Reuters) - NATO's European allies and Canada increased defence spending by 3.8 percent last year, or $10 billion (8 billion pounds) more than 2015, the alliance said on Tuesday, and said Britain was keeping up with its target after a report said London missed its goal.
Russia's annexation of Crimea has given the alliance new momentum after years of cuts, but differences remain about the pace of investment. The International Institute for Strategic Studies, a security think tank, said only Greece and Estonia met a target to spend 2 percent of economic output on defence.
A NATO official told Reuters that five allies, including Britain, met or exceeded NATO's benchmark in 2016. NATO is expected to release its full 2016 figures next month.
Europe's low expenditure has long been a sore point for the United States, which puts up 70 percent of alliance funds, and U.S. President Donald Trump has made change a priority, saying allies have "been very unfair to us" for not spending more.
NATO will tell new U.S. Defence Secretary Jim Mattis on Wednesday in Brussels that Europe is responding.
"We are making a significant step forward but we have a long way to go ... it is not enough," Stoltenberg told a news conference, saying Trump raised the issue in the two phone calls the two men have held.
However, Russia's 2014 annexation in Ukraine and the rise of Islamist militancy - not U.S. pressure - led to last year's increase in European spending, NATO diplomats and analysts said.
Stoltenberg said the Baltic states of Latvia and Lithuania, who fear a repeat of Crimea, were on course to meet the 2 percent goal, while Romania was also heading towards that level.
Germany is increasing spending by 2 billion euros ($2.13 billion) in this year's budget.
However, IISS's study said Britain's level fell slightly to 1.98 percent in 2016 as the economy grew faster than defence outlay. Poland also slipped, it said.
Britain said the IISS figures were incorrect as the think tank presented its figures in U.S. dollars and so had been impacted by exchange rate fluctuations.
"NATO's own figures clearly show that the UK spends over 2 percent of its GDP on defence," a spokesman for the Ministry of Defence said in a statement.
"Our defence budget is the biggest in Europe, the second largest in NATO, and it is growing each year as we invest 178 billion pounds ($221.88 billion) in new equipment."
In 2015, only Greece, Estonia, Poland and Britain hit the 2 percent NATO target. British Prime Minister Theresa May, who discussed the issue with Trump last month, has warned EU leaders to raise their defence spending.
Stoltenberg acknowledged difficulties. "The picture is still mixed, some allies are still really struggling," he said when asked about budget constraints in Italy, which is trying to reduce its budget deficit following the euro zone crisis.
