I am bitterly disappointed and stunned by the decision

Camelot chief executive Tim Holley

The current licence expires in October next year.

But if the People's Lottery is not prepared to meet the commission's demands, lottery officials will discuss with the government what steps to take further.

Camelot - owned by Cadbury Schweppes, De La Rue and Racal - was widely tipped as the commission's favourite, given its record of efficiency and technical competence. It is backed by the Post Office.

It has, however, faced criticism for the high salaries it has paid its executives.

The Branson consortium had been perceived as a popular public choice.

The commission had assessed the two players on three criteria:

• The amount of money pledged for good causes
• The integrity of the contender
• Whether the players' interests would be protected.

The Commission's chair Dame Helena Shovelton said both bids had "many merits", adding that they had already given the bidders "every chance" to improve their applications.

"We have acted as a tough regulator, dealing with issues of propriety in the way that we should," she said.

Camelot's chairman Sir George Russell: Company is disappointed

"But they also had important failings. We are disappointed with that, but we would fail in our statutory duty if we granted a seven-year licence based on either bid in its current form."

The People's Lottery bid was felt to have had a number of legal uncertainties, with the commission raising doubts about its ability to protect players.

And Camelot's relationship with Gtech, the US lottery company which provides terminals and equipment, ruled its bid out.

The commission felt problems with the Gtech software had not been resolved.

Camelot chief executive Tim Holley said he was "bitterly disappointed and stunned" by the decision.

The lottery raised �1.4bn for good causes lin 1999

The company is studying "in detail" the statement by the National Lottery Commission. It would not say if it would mount a legal challenge.

Sir Richard Branson, currently stranded on his Caribbean island by Hurricane Debby, was said to be delighted by the news.

The Lottery Commission had originally been expected to make its decision at the end of June, but it decided to delay the decision, calling on the consortia to improve aspects of their bids.

Fresh promises

In the run up to Wednesday's announcement, both parties have tried to outdo each other with promises of new games and pledges of �15bn for good causes.

And they promised to install new terminals for the main twice-weekly online game in 35,000 retailers, and to develop ways of playing the lottery on the internet, on mobile phones and on interactive television.

The main challenge for whoever eventually runs the lottery will be to revive sales, which have dipped as the lottery has matured.

Income has levelled out at �82.5m a week, while sales of scratchcards are between �9m and �11m.

Two-thirds of the UK regularly play the lottery, spending �28bn over the past six years and raising �8.8bn for good causes.

Last year the present operator, Camelot, turned over more than �5bn, and raised more than �1.4bn for good causes and a further �611m for the government in tax.