There are fears that meat from lambs reared on 300 farms in Wales could be contaminated as some farmers may be illegally dipping their sheep in chemicals normally used on crops.
The effect of the illegal dip on animals or humans is not known
The pesticide in question - a form of the chemical Cypermethrin - is up to six times cheaper than approved ones but has never been tested for use on animals and is thought to damage health if people are exposed to excessive amounts.
Added to that, the Environment Agency says it is also thought the chemical is being dumped in rivers, killing insects and starving the fish which feed on them.
The government's Veterinary Medicines Directorate (VMD) has begun an investigation after hearing the possibility that hundreds of farmers in mid and west Wales had bought the chemical - sold to kill insects on crops.
"We don't know what effect the arable formula of Cypermethrin has on sheep because it hasn't been tested on animals," said a spokesman for the Veterinary Medicines Directorate.
"We also need to know what effect it has on people, the consumer and the environment."
The chemical may have been dumped in the river Teifi killing fish
The Environment Agency has said that 6,000 litres a year of the chemical in question have been sold in hill farming areas, which it says is far too much for a region that does not grow crops.
Earlier this year, illegal dumping of Cypermethrin was blamed for a fall in the numbers of brown trout in the river Teifi, running through Ceredigion.
This led to the Environment Agency to believe that many farmers in the Upper Teifi catchment and in other parts of Ceredigion, Carmarthenshire and Powys had been using Cypermethrin pesticides to treat sheep.
South Wales farmer Ed Rees said that if farmers in the west were using the dip, then they were clearly breaking the law.
"Obviously, its not right what they are doing but you can't blame them for looking after their stock and succumbing to economic pressure," he added.
A statement from Defra (Department for Environment
Food and Rural Affairs) said : "No research has been conducted into the use of this chemical in sheep dip. So there is no evidence that it could be harmful to animals, the environment or potentially enter the food chain."
It advised farmers not to use this chemical when they dip sheep this autumn and warned they would be prosecuted if they did.
Huw Williams, Ceredigion Council's assistant director of environmental health, said they heard about the problem before the start of the sheep dipping season back in May and had alerted neighbouring councils.
"Although we've identified this practice we don't know if it is restricted to west Wales or if it is a nationwide problem," he said.
John Thorley, chief executive of the National Sheep Association said he was very concerned.
"We've started to develop a good name as an industry and this sort of thing is extremely inappropriate."