The classification of ketamine - which has become increasingly popular with clubbers - could be upgraded "at some point", the Home Office has said.
Government adviser Professor David Nutt said the drug, designed as a horse anaesthetic, could be doing "permanent damage" to some users' bladders.
The Home Office said it intended to review whether ketamine should remain at class C.
This puts it in the "least dangerous" category of illegal drug.
Upgrading ketamine's classification could increase the maximum sentence for possession from two years to at least five years.
The drug was linked to the deaths of 23 people between 1993 and 2006. Most had accidents after taking it.
'Spasms and pain'
There have been concerns it is growing in popularity on the UK club scene and it was made illegal in January 2006, after a surge in the number of people using it.
Prof Nutt, an expert in addiction based at Bristol University, told the Commons home affairs committee: "We are seeing a consistent increase in use and we are seeing a very worrying effect in terms of bladder spasms and bladder pain.
"There is concern that it is causing permanent bladder damage."
He told the MPs he had heard that many young people were turning to ketamine as a recreational drug because the street strengths of ecstasy and cocaine had declined.
On a possible review of the law, Prof Nutt added: "Class C may be the wrong class."
Substances listed in this category by the Home Office are considered the "least dangerous illegal drugs".
Possession of class B drugs, such as cannabis and amphetamines, carries a maximum sentence of five years in jail, while for class C drugs it is two years.
The penalty for being caught with the most dangerous - class A - drugs, such as heroin or cocaine, is seven years.
A spokesman for the Advisory Council on the Misuse of Drugs, which is part of the Home Office, told the BBC: "Part of the remit of the ACMD is to look at the harms of drugs within the Misuse of Drugs Act.
"We recommended that ketamine be categorized as a class C drug four years ago and we intend to review this at some point in the future as more evidence is becoming available on the long-term harms of the drug."