Yellow Pages owner Yell is facing the possibility of new price controls after a watchdog said competition in the directories market was not working.
The Competition Commission yesterday said it planned to consult on possible remedies, including discussions on the level and scope of future price controls.
Yellow Pages is already the subject of a price cap on advertising rates, but the CC said the business continued to hold a powerful position in the market.
Yell has argued during the year-long inquiry that the rapid growth of the internet and re-entry of BT into the market meant there was no need for continued regulatory involvement.
However, inquiry chairman Diana Guy said: "Yell continues to hold a powerful position in this market and we have found that competition is not working effectively.
"Prices are capped at the moment and we think that, without this price cap, advertisers would pay more than in a well-functioning market." In its provisional findings the Competition Commission said the majority of Yell's prices exactly matched the maximum permitted by the price cap and did not appear to be constrained by competitors.
It added: "Discounts are offered to some new advertisers and to encourage increased expenditure, but the CC has found little evidence that these discounts are given in response to competition, whether from other directory providers or from the internet."
The CC said it had given a lot of thought to the impact of the internet but pointed out that revenues of all the major directory providers continued to grow. Ms Guy
added: "The position seems to be that the internet, with its powerful search facilities and the ability to buy online, offers a new, and different, product for advertisers."
Yell Group chief executive John Condron said he was disappointed by yesterday's findings and said his company would continue to lobby the Commission in its discussions over potential remedies.
He added: "In our increasingly competitive environment, and particularly with the rapid growth of the internet and the re-entry of BT, there is no need for continued regulatory involvement."
The Competition Commission said Yell had a market share of 75 per cent - five times its nearest competitor.
A price cap of inflation minus two per cent was set on advertising rates following a Monopolies and Mergers Commission investigation ten years ago, which found that a monopoly existed in favour of BT - the then owner of Yellow Pages. That was strengthened to inflation minus six per cent in 2001.
With its UK growth constrained by price caps, Yell has been aggressively expanding overseas by taking part in the consolidation of the directories sector.
In April it agreed to buy a 60 per cent stake in Spanish directories business TPI from telecoms group Telefonica as part of a £2.1 billion bid for the entire company. In May 2005 it bought US telephone directory publisher TransWestern for 858.6 million.
"While the provisional findings are a setback for Yell, we believe they should be understood within the context of the overall Yell investment case," Numis analyst Lorna Tilbian said. The Competition Commission publishes its final report in November, ahead of an April deadline.