The Office of Fair Trading should investigate the impact council-funded free newspapers are having on regional papers, a committee of MPs has said.

The Culture, Media and Sport Committee said it was concerned about the growing number of council papers and the effect they were having on local democracy.

Some were "misleading in nature" and showed political bias, the report said.

Many local papers have closed in recent years with some editors blaming the effect of council-funded publications.

Research from the Newspaper Society last year found that nine in 10 councils now print their own newspaper.

Paul Burstow, the Liberal Democrat MP for Sutton and Cheam, led a debate on the issue in Westminster earlier this year in which he highlighted the impact that council newspapers, funded by local taxpayers, were having on the health of the independent local press.

He highlighted one example of a London council which produced a 72-page paper which includes news, reviews, TV listings and restaurant features. Meanwhile the local paper has seen its circulation drop by 62%.

In the report by the Culture, Media and Sport Committee on the future for local and regional media, committee chairman John Whittingdale said the industry was facing "unprecedented challenges".

'Political propaganda'

He said: "This has led to the closure of a large number of newspapers, many commercial radio stations becoming loss-making and the possible end of regional news on commercial television.

"This has serious implications for local democracy."

While it was important for local authorities to communicate with their citizens, it was "unacceptable" that councils could set up publications in direct competition to local newspapers and "act as a vehicle for political propaganda", he said.

The MPs recommended making it mandatory for publications to clearly state on their front page that they are published by a local authority.

Elsewhere in their report, the MPs called for OFT rules which prevent media organisations from working together to be re-examined.

On the issue of news aggregation websites - such as Google News - the committee said it was "not acceptable" that local newspapers were prevented by competition laws from taking collective action.

It called on the government to re-examine the current merger rules to allow consolidation.

The committee ruled out state subsidies for newspapers but urged publishers to "innovate to survive" by continuing to develop websites and use internet technologies.

The committee also looked at the future of ITV's regional news, saying the situation was in danger of reaching a "crisis point" that could jeopardise the plurality of regional television news.

It recommended removing or reducing ITV's public service broadcasting obligations and regulatory burdens if it was not financially viable for existing licensees to continue to provide regional news.

He said: "This has led to the closure of a large number of newspapers, many commercial radio stations becoming loss-making and the possible end of regional news on commercial television.

On the issue of news aggregation websites - such as Google News - the committee said it was "not acceptable" that local newspapers were prevented by competition laws from taking collective action.

It called on the government to re-examine the current merger rules to allow consolidation.

The committee also looked at the future of ITV's regional news, saying the situation was in danger of reaching a "crisis point" that could jeopardise the plurality of regional television news.

It recommended removing or reducing ITV's public service broadcasting obligations and regulatory burdens if it was not financially viable for existing licensees to continue to provide regional news.