The Salvation Army wants children banned from using slot machines
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Claims that ministers want to limit the size of teddy bears given as prizes at seaside arcades have been denied.
There have been suggestions the prizes could be outlawed as part of measures to discourage children from gambling.
Under the Gambling Bill, which paves the way for super-casinos, maximum winnings from seaside arcades would be cut from the current £8 to £5.
A culture spokesman said the aim was to stop children gambling for big prizes, not to control the size of teddy bears.
The Daily Telegraph reported concern that it could outlaw top prizes in arcade games like crane grabbers.
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Fruit machines can be some of the most addictive forms of gambling
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It has been suggested that larger teddy bears in the crane grabbers could be worth more than £5, and so will have to be replaced with smaller, cheaper ones.
Other games which will need to not offer prizes of more than £5 include those that roll coins and fruit machines.
The culture department spokesman said: "We're not controlling the size of the teddy bears, we are doing this so that children aren't able to gamble for high stakes and high prizes.
"We don't believe it is right for children to play for high value prizes.
"It's about protecting children and making sure children don't get into gambling.
"We're not out to stop children from playing with them altogether, after all it's part of seaside fun and has been family entertainment for a long time."
Gambling habit
The proposal, which will also remove fruit machines from take aways and minicab offices, has prompted protests from arcade operators and MPs.
John Gummer, a Tory MP and former Cabinet minister, told the Daily Telegraph: "For a very small amount of money, the machines give a great deal of pleasure to people hoping for a teddy bear."
Jonathan Lomax, spokesman for The Salvation Army, said they were not concerned by crane grabber games which offered teddy bears as prizes.
But he said it had case studies of 11 and 12 year olds who started out on fruit machines but then ended up with serious gambling habits.
'Nanny state'
Mr Lomax said: "Children and gambling should not mix.
"An NOP Poll commissioned by The Salvation Army showed that 82% of the public think that children and young people should not be allowed to gamble on fruit machines.
"Fruit machines can be some of the most addictive forms of gambling and, following the Bill, the UK will still be the only country in the developed world that allows children to gamble."
Tory shadow culture secretary John Whittingdale said the amusement arcade rules were a prime example of the government's confused priorities.
"Mr Blair's proposal is the nanny state gone mad," he said. "It risks destroying many of our seaside arcades and we are determined to force the government to back down."