Severn Trent could be fined up to 10% of its turnover

The regulator announced its intention to impose a penalty after examining the company's performance since June 2005.

It is part of a wider investigation into irregularities at STW, which admitted misreporting service data in April 2006.

This covers the handling of customer complaints and queries. Ofwat could levy a penalty of up to 10% of turnover which was �2.29bn in 2005/6.

The regulator will make a decision once experts from accountants Ernst & Young have finished their investigations.

If customers have been disadvantaged then Severn Trent Water shall reimburse them STW spokesman

A final report is expected in the summer, although Ofwat has told the BBC that investigators will take as much time as necessary.

Philip Fletcher, Chairman of the Water Services Regulation Authority, said: "It is extremely disappointing that we have had to launch this investigation into an area of Severn Trent Water's customer service activities, following our earlier investigation into other aspects of its business.

"From the evidence we have seen it is clear that Severn Trent Water has failed to meet the GSS (Guaranteed Standards Scheme) performance standards.

"A financial penalty will send a clear message to Severn Trent Water that it must meet its legal obligations to its customers."

STW has promised to introduce improvements, which will be monitored by Ofwat.

A STW spokeswoman said: "We have been, and will continue, to work in full and open cooperation with Ofwat, and if customers have been disadvantaged then Severn Trent Water shall reimburse them."