The Department of Health and drug suppliers have clashed over who is responsible for the rocketing cost of unbranded medicines.

At a health select committee hearing last week, representatives of the generic drugs industry said shortages and price rises were triggered by the December closure of Regent-GM Laboratories on public health grounds.

They said problems were exacerbated by the operation of 'category D' - a listing for drugs in short supply that allows pharmacists to dispense more expensive alternatives - and a move from bulk supplies to patient packs.

But the DoH submitted evidence hinting that it believes manufacturers and wholesalers have been profiteering from the situation. And health minister John Denham denied that the government had pulled out of plans to manage the transition to patient packs.

'The NHS has, for decades, been able to rely on a competitive market that has largely sorted itself out for the benefit of the NHS. This year, the market has clearly failed, ' Mr Denham said.

He said the government had been given repeated assurances that the market would 'right itself ', but had been forced to take action when it became clear this would not happen.

The Office of Fair Trading has already been asked to investigate the price explosion. Oxford economics fellow Dr Dieter Helm has also been asked to conduct a study of the drugs market, although a 'scoping study' will not be ready until January.

Mr Denham said this 'fundamental review' would look at 'all the alternatives' available to the government, including alternative sourcing, 'if it is not possible to get the market functioning as it did in the past'.

A DoH memorandum submitted to the committee agrees that the 'initial shock' to the market came from the closure of Regent, which supplied about 10 per cent of generic drugs.

But it says 'key questions' that have arisen since include whether some suppliers have been holding 'excessive stocks of certain products for speculative purposes' and manipulating the category D rules to 'institute very significant price increases'.

Drug industry representatives declined to admit this was happening, although they told MPs that 'shortline' wholesalers, which carry only a few lines, were not represented and hinted they might be in a position to speculate.

There was general condemnation of category D. Jon Close, chair of the British Generic Manufacturers Association, said the rules for entry - less than four weeks' supply - were 'nonsense' when suppliers could work on 12-14 day turnaround times.

He also said the rules 'almost force the price up', but said this was 'not our fault' since the industry had been calling for changes 'for more than a year'.

Andrew Kay, chair of the generic medicines committee at the Association of the British Pharmaceutical Indus t r y, sa id the government had pulled out of plans to manage the introduction of patient packs in October, which 'could have avoided many of the problems'.

But Mr Denham said: 'If you have been told that there were extensive plans for an orderly transition that is not the case.'

MPs repeatedly pressed manufacturers and wholesalers on the points set out in the DoH memo. But Mr Close told them they should not be 'alarmist' when a return to branded medicines would cost the NHS£2bn.

Facts and figures

Prices for all generic drugs have risen by between 1.5 per cent and 6.3 per cent every month since April.

Of the top 100 generic drugs, 25 per cent have gone up by more than 50 per cent and a further quarter by between 10 and 15 per cent.

The number of category D preparations has gone up from about 30 to more than 200, or from 1 per cent of all prescriptions to 15 per cent.

Price increases include Amoxycillin (an antibiotic used for chest infections), which has risen in price from 47p for 15 tablets to£1.69.