Thames Water is encouraging customers to save water

The firm also announced a 31% rise in pre-tax profits to �346.5m.

Though the volume of water lost has reduced, it still shed 894 million litres per day to leaks - a performance regulator Ofwat called "unacceptable".

The company has enforced a hosepipe ban and is now asking for a drought order covering two million of its eight million customers.

The ban would affect London and small parts of Kent and Surrey. The housepipe ban applies to all customers.

'Supply commitments'

The company's poor leakage performance is not only inefficient, it is also contributing to water shortages Ofwat Clickable drought map: check your area Send us your comments Anger over leaks

Ofwat had set a target of losing no more than 860 million litres of water a day - which Thames missed by 34 million litres a day.

In 2004/05, it missed its target by ten million litres a day.

In a damning statement, the regulator said that "given its current leakage performance we are concerned that the company may not meet future leakage targets or its security of supply commitments".

Ofwat said customers were paying the higher prices Thames Water had been allowed to charge - an average increase of 24% over 2005 to 2010, excluding inflation - without getting all the benefits the company had promised to deliver.

THAMES WATER LEAKAGE MEGALITRES per DAY 2000-01: 688 2001-02: 865 2002-03: 943 2003-04: 946 2004-05: 915 2005-06: 894 Source: Ofwat

It added: "Although the current drought is the result of below-average rainfall for two consecutive winters, we expect Thames Water to set a good example by controlling its leakage.

"The company's poor leakage performance is not only inefficient, it is also contributing to water shortages that have led Thames Water to impose a hosepipe ban and seek a drought order."

It said Thames Water should spend as much as necessary "to remedy its leakage failure" and give customers value for money as well as a secure supply.

OFWAT - HOW IT REGULATES Has legal duty to make sure water firms comply with their licences, which set out their operating conditions Can issue enforcement orders for firms which breach their licences Can fine companies 10% of their turnover for breaches of licence or failure to meet standards Can change a firm's licence

The firm, which is owned by German utility group RWE, said it was "disappointed" to have missed the target, despite reducing leakage to its lowest level for four years.

"It is immensely frustrating that despite our strenuous efforts to reduce leakage we have missed our target," said Jeremy Pelczer, Thames Water's chief executive.

"We remain committed to achieving our target over the full five-year regulatory period."

On the profits, Mr Pelczer added: "In the face of a challenging year for Thames Water and the whole sector, we are pleased to deliver a good set of results."

'Real difficulties'

But the customers' group, the Consumer Council For Water said Ofwat should look what could be done to deter Thames from missing their leakage targets in future.

"Thames have continued to miss their targets for the past five years. It is completely unacceptable as customers are being asked to restrict their water use", spokesman Andrew Marsh said.

"They are making big profits and there's a credibility gap between making large profits and asking customers to save water.

"If the drought order they want is granted, they will have real difficulties getting customers onside."