Local dispensing chemists have been protected from full competition by the main supermarket chains under government proposals unveiled on Thursday.
Small pharmacies felt threatened by the OFT's proposals
The government rejected a recommendation from the Office of Fair Trading (OFT) to completely lift restrictions on the number of pharmacies operating in any area.
However, fears were raised that the market could face de-regulation through the back door under a number of exemptions proposed by the government.
These exemptions would allow pharmacies could operate without having to go through the usual licensing system.
The government said pharmacies intending to open up in large shopping centres - defined as more than 15,000 square metres - would be exempt as long as they provided a full range of services.
Pharmacies which remain open for more than 100 hours a week would also be exempt.
There are nearly 10,000 community pharmacies in the UK selling prescription and over-the-counter drugs - a market that is worth about £8.6bn.
At the moment, the number of pharmacies allowed to operate in any area is restricted through a licensing system run by the local health authority.
The OFT's proposal had raised fears from local chemists that they could lose out to competition from in-store pharmacists in supermarkets, leading to the closure of thousands of local chemists.
Trade & Industry Secretary Patricia Hewitt said it was too early to consider opening up the market to full competition.
"The government does not believe that simple deregulation is the best way to achieve our aims," she said.
"The OFT made a strong case that the current control of entry rules impede competition and reduce benefits for consumers.
"But given the current shortage of pharmacists, and the government's desire to see pharmacies given a new and
strong role in the modern NHS, the government does not believe that this is the time to move to a fully deregulated system."
The head of the OFT said the public would miss out under the government's proposals.
"While some liberalisation is better than no liberalisation, we see this as a missed opportunity," said John Vickers, chairman of the OFT.
"The pharmacy entry rules do not just impede competition and reduce benefits for consumers, they block new and better ways of delivering medicines to the public."
But the charity Help the Aged welcomed the decision not to go for full deregulation, saying community pharmacies provided a vital service.
"Removing these regulations would threaten the many thousands of community pharmacies which many older people rely on, particularly those in isolated or rural communities," said spokesman Jonathan Ellis.
The Pharmaceutical Services Negotiating Committee (PSNC), which represents community pharmacies, gave the government's decision cautious approval.
"We welcome the decision to reject the OFT's recommendation that regulation of pharmacies be abolished," the PSNC said.
"But we are concerned that by proposing substantial exemptions, the government's proposals could amount to de-regulation by the back door."
The PSNC noted that the 15,000-square-metre minimum for shopping developments covered many inner city complexes and not just out-of-town sites.
The head of the All-Party Pharmacy Group, Dr Howard Stoate MP, echoed the concerns of the PSNC.
"We're not convinced that the Government's proposals in response to the OFT report will safeguard local pharmacies," he said.
"We are concerned that (the exemptions) could have the effect - no doubt unintended - of damaging patient services provided by local neighbourhood pharmacies.
But supermarket group Asda said the proposals could lead to many more pharmacy outlets in its stores.
"Should these proposals be accepted and entry controls reformed, we expect a rapid expansion of pharmacies in the next five years - in stark contrast to the last 16 years of stagnation," said John Evans, Asda's superintendent pharmacist.