The BBC's Daniel Sandford: "It seems the Institute has rejected the drug at the first stage of the process"

The health watchdog responsible for assessing new treatments is reported to have concluded that there is not enough evidence that the Relenza drug is cost-effective.

Relenza - a powder-spray inhaled through the mouth - is produced by the Glaxo Wellcome company.

And the company, which could take legal action over the decision, is said to be infuriated by the move.

The drug is said to reduce the length and severity of flu if taken at the right time.

But at £24 a time, there are fears it could overwhelm local NHS budgets.

Dr George Rae from the British Medical Association: "Prevention is better than cure"

The National Institute for Clinical Excellence, which was set up by Health Secretary Frank Dobson to assess new treatments, is set to report that there is not enough evidence to show that the drug is effective with the groups at which it was to be targeted, such as the elderly.

The company can appeal against the recommendation, and a spokesman said discussions were continuing.

Difficult dilemma

Relenza is already available in New Zealand and Australia, and is due to be launched in Germany on Friday.

Glaxo Wellcome says discussions over the decision are continuing

The final decision will rest with Mr Dobson, and the case presents him with a difficult dilemma.

If he accepts the institute's recommendation, he could face accusations of rationing. But if he rejects the finding, he could damage the credibility of a body he created.

The decision is seen as the first big test of the institute, which wants more information before it will recommend the drug.

There were indications a month ago that there could be trouble ahead over the new drug.

Government advisors warned that it could cost the NHS approximately £115m if there is a flu epidemic.

GP concern

The National Prescribing Centre said in a bulletin to health service managers that Relenza could "increase expectation dramatically".

The BBC's Fergus Walsh: "The first drug to be considered by the NICE"

The document predicted that 4.8 million people could need the drug during an epidemic year.

Doctors' organisations have also warned about the dangers posed by the drug.

During the last flu epidemic, in the winter of 1989/90, 600 people in every 100,000 went to see their doctor with flu.

And it is feared that many more people will visit their GPs to demand the new treatment if it is available on the NHS.

Dr George Rae, chairman of the British Medical Association's GP's prescribing committee, said: "What we would hope is that the government will now alleviate the concerns that GPs have about Relenza.

"There could be a huge impact on GP's workload if it was freely available, as patients have to be seen within the first two days."