The draft revised ruling comes just three months after the OFT dropped its initial plans to revamp the distribution system.

There were fears that changes would result in the closure of magazines, threatening UK printers.

But the OFT has now indicated that the current "exclusive territories" agreement is "not working well for customers". It claimed that the wholesaler is prevented from selling to retailers located outside of its exclusive territory and retailers cannot seek a better deal from rival wholesalers.

It also said that retailers are complaining over wasted newspapers and magazines around 1.7m newspapers are unsold each day and at least 1m magazines are returned.

"It is important that this market delivers choice, innovation and a competitive process for consumers," said OFT chief executive John Fingleton. "Parties must weigh the harmful effects of their agreements against any benefit they can identify."

Fingletons comments will come as a setback for the PPA, which had expressed optimism at his appointment last November.

The PPA chief executive Ian Locks said that the verdict was not good news for small retailers or the press.

"Also of concern is the fact that the OFT appears to be taking the narrowest terms of reference into account and not looking at the wider public interest considerations," he said.

Lord Heseltine, chairman of PrintWeek publisher Haymarket had proposed an administrative levy as a means of improving relations between publishers and small retailers.

Magazine Distribution
July 2004 government proposes to push through EU competition regulations
May 2005 PPA warns 1,000 titles could suffer if initial OFT proposals go through
March 2006 OFT drops its distribution plans
June 2006 OFT declares current system illegal