BBC News' Rory Cellan-Jones meets British car buyers in Europe

The OFT says it has referred the matter to the Monopolies and Mergers Commission (MMC) for deeper investigation.

The consumer watchdog questioned 17 car makers and more than 400 dealers in the market worth £24bn a year in the UK.

The OFT's initial enquiries follow investigative reports aired on television last year which were said to show that carmakers were dictating the retail prices of their cars to dealers, preventing the retailers offering discounts.

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Comparisons showed UK car prices higher than those on the Continent with little variations on price between British dealers.

John Bridgeman, director general of the OFT said: "It is clear that the market isn't working properly and that there is an imbalance of power between manufacturers and dealers, which is distorting competition.

The OFT says that most dealers "appear to be far from independent" and reported an uncooperative response from some manufacturers.

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"Overall, the distribution of new cars appears to be as inefficient now as it was eight years ago and there is a strong case for re-examination by the MMC," Mr Bridgeman said.

The OFT said that its seven-month inquiry found that manufacturers would not give volume discounts to dealers, which could have been passed on to the consumer.

In addition, the practice of setting 'recommended retail prices' by manufacturers appeared to give good profits to even inefficient delaerships.

'Nothing to hide'

The Society of Motor Manufacturers and Traders (SMMT) said in a statement it would co-operate fully with an inquiry, that it had "nothing to hide" and that the industry adhered to "the framework of rules defined by UK and European governments".