The report by the Competition Commission said there was a "complex monopoly" in the market.

The market - worth �900m a year - was also operating against the public interest, it added.

Consumers will be given more information before they buy and greater rights to cancel agreements, under proposed reforms.

The commission was asked to look into the extended warranties market by the Office of Fair Trading (OFT).

'Shop around'

Instead of banning retailers from selling extended warranties, the government is proposing a package of measures to protect consumers from unfair selling.

It is cheaper to pay for repairs as and when they happen rather than buy a warranty Consumers' Association Q&A: Extended Warranties

Among the most far-reaching reforms suggested is the right for consumers to have 45 days to cancel their extended warranty and receive a full refund.

In addition, customers can terminate an extended warranty at any time after the 45 days and obtain a pro-rata refund.

Retailers will be required to offer the extended warranty on the same terms for 30 days if the consumer chooses not to buy it there and then.

Discounts tied to the purchase of the extended warranty would also be available for 30 days.

Lengthy enquiry

The commission's announcement is the latest in a decade-long debate about the merits of extended warranties.

Timeline 1994: OFT study into extended warranties recommends voluntary code of conduct 1996: Another OFT investigation May 2001: OFT found code was not working and consumer survey confirmed market was not pro-consumer July 2002: OFT referred the market for extended warranties to the Competition Commission

The OFT has been looking into this incredibly lucrative market since 1994.

In 2002, following a damming report, it referred the market to the Competition Commission.

Patricia Hewitt, secretary of state for Trade and Industry, said she accepted the commission's findings.

"Most electrical goods already come with a one-year guarantee. If consumers decide they need an extended warranty, I would advise them to shop around and check they're getting the best value for money."

Plain wrong

The OFT will conduct a review in two years time to determine whether reforms are working.

But, the UK's largest electrical retailer Dixons said that the Competition Commission finding - that a complex monopoly was at work in the extended warranty marketplace - was plain wrong.

"This market is extremely competitive as demonstrated by the wide range of market entrants and variety of products which meet a clear consumer need as recognised by the Competition Commission," said chief executive John Clare.