A trade watchdog has launched a probe into the �2bn licensed taxi market, amid fears of over-regulation.

The Office of Fair Trading said it was to investigate "how well the market is working for consumers".

The inquiry would focus on regulations which have allowed almost half of regional councils in England and Wales to restrict the numbers of licences issued to taxi drivers.

"This is a large and growing market which is highly regulated," OFT director general John Vickers said.

"We want to be sure that regulation strikes the right balance so that passengers have the protection they need while reaping the benefits of effective competition."

The current regulatory regime allow regional councils to limit the number of licences issued, while denying London authorities the same powers.

However, taxi drivers in the capital must pass "the knowledge", a test of their geographical skills.

In Scotland, officials can, besides limiting licence numbers, specify taxi design, while Northern Ireland authorities have powers to check the roadworthiness of vehicles and "repute" of drivers.