The National Air Traffic Service (Nats) is running into severe funding difficulties, an official report has warned.

It says the service has lost money because fewer aircraft are flying over Britain and paying for air traffic control services.

The National Audit Office (NAO) says the government failed to take account of all the risks when it partially privatised the service.

In a report published on Wednesday, the NAO says that future investment in advanced computer systems and new Scottish control centre are now at risk.

Less planes are crossing the UK

The criticisms come one day after the government unveiled proposals for a massive increase in the UK's airport capacity to cope with what ministers believe will be a massive increase in air travel.

Shareholders in Nats such as British Airways and Virgin have been affected by the downturn and were therefore unlikely to be able to bail out the service.

Nats is talking to a potential new investor - the airport company BAA.

In June Nats chief executive Richard Everitt said BAA were looking into an investment of around �50m to �65m.

"BAA have indicated they will be prepared to make an investment in NATS," Mr Everitt told the influential House of Commons transport committee.

The potential investment by BAA would be matched by the government.

�60m bailout

In March, the government provided �30m in emergency funding, as part of a �60m bailout.

Just two months later the UK's airports were thrown into chaos as a computer problem saw many flights grounded.

This is detracting from Nats' primary focus of ensuring safe reliable air travel

Prospect Trade union

The problem began after a regular monthly computer upgrade at Swanwick, which controls most of the airspace across England and Wales.

It was the third time in two months that flights were delayed by air traffic control system problems.

Mr Everitt has said he is confident that Nats can resolve its financial difficulties although he has also warned investment might not be forthcoming unless the charging formula can be changed.

Nats is hoping to increase the fees it charges airlines to use British air space.

Fee rises rejected

Airlines are opposed to the rise in fees as many of them are also under severe financial pressure as they cope with the slump in travel after the 11 September attacks.

Nats applied to the Civil Aviation Authority (CAA) for an average increase of 5% per annum for three years, starting in January 2003.

But the CAA said at the time the rises were not justifiable.

The decision means the sum Nats can charge airlines is due to fall in real terms between now and the end of 2005.

Prospect, the union which employs 3,500 air traffic controllers and engineers in Nats, said the CAA decision was "deterring" new investors.

The union added the financial problems were "detracting from Nats' primary focus of ensuring safe reliable air travel".