The Northern Ireland Affairs Committee said the move was needed to tackle fuel smuggling and laundering.

The current price of fuel in the Republic of Ireland is lower than that in Northern Ireland. Large amounts of illegal fuel are smuggled across the border into Northern Ireland.

The Northern Ireland Affairs Committee said the profits made were helping to "sustain terrorism".

The sale of this illegal fuel is endemic throughout the border regions and evident in all parts of Northern Ireland, with both organised criminals and paramilitaries being involved

Commons committee

The committee's report said: "It is within the Treasury's power to mitigate a significant source of paramilitary and organised criminal finance by reducing fuel duties in Northern Ireland.

"Decisive action is needed now in order to stem the tide of lawlessness and bring about lasting economic stability in Northern Ireland."

'Commercial disadvantage'

A number of smaller legal fuel operators were being forced out of business because of an increase in smuggling, said MPs.

"The sale of this illegal fuel is endemic throughout the border regions and evident in all parts of Northern Ireland, with both organised criminals and paramilitaries being involved," said the report.

In view of the shortcomings of the present scheme, we consider that a new more comprehensive and effective licensing regime is urgently required

Commons committee

Excise duty on petrol is 20p per litre on petrol and 25p per litre on diesel higher in Northern Ireland than in the Republic of Ireland.

"We are therefore calling on the Government to carry out a full cost-benefit analysis of the effects of the differential on Northern Ireland, as a prelude to setting a separate, lower, rate of fuel duty for Northern Ireland which would go some way towards mitigating the unique problems that have arisen," said the committee.

Three-day operation

Northern Ireland's Federation of Small Businesses said it welcomed the report.

Policy chairman Wilfred Mitchell, who gave evidence to the committee, said: "We are delighted that the committee has taken up a key recommendation of ours that the government should implement a separate lower rate of duty for Northern Ireland.

Fuel "laundering" plants have been uncovered close to the border

"The reality is, that Northern Ireland is different, as it is the only part of the UK that shares a land border with another member of the European Union and therefore the Treasury should recognize this unique situation."

Earlier this month, Customs officers seized 26 vehicles including a petrol tanker during a three-day operation to combat the use of illegal fuel.

One of the vehicles seized was a tanker carrying red diesel. And a total of 70,000 litres of unleaded fuel and 14,600 litres of red diesel were seized, customs officers said.