The pharmaceutical branch of the Distillers' Company is proposing to set up a trust fund with an initial deposit of �5m for the 340 children born with physical deformities.

The deal by the large drinks company means its offer of �5m compensation, which was made last month, would not be increased.

Instead, it proposes that sum could be more than doubled if placed in a trust at a rate of �500,000 per year over 10 years for children born with physical disabilities caused by the drug taken during pregnancy.

Charitable trust

Distillers' has made the offer on condition the government passes legislation granting the 10-year fund the same taxation status as a charitable trust.

A statement said: "Unless the government agree to the taxation conditions which the company seeks the offer shall lapse."

It has led to accusations the difference between the �5m deposited and the �11.85m which will become available will be met by the tax payer.

It is not yet known if families of the victims will welcome the decision.

But pressure has been growing for a settlement to be reached and end the ongoing battle which has been discussed for 10 years.

The drug became notorious in the 1960s when it was prescribed to pregnant women to ease morning sickness.

It was later found to cause severe birth defects by limiting the blood flow to developing limbs.

Many children across the world were born limbless or with severely shortened limbs.

Last month, the government announced it was making �3m of public money available for the benefit of congenitally disabled children, including those sufferings the after-effects of the thalidomide drug.

But this was criticised by charity groups as being too low to make a real difference to victims' lives.

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