An official government report is set to conclude that booming demand for biofuels has had a "significant" impact on global food supplies, forcing ministers into a major rethink of controversial biofuel targets.

According to reports in today's Guardian newspaper, The Gallagher Review will warn that while some biofuels can have environmental benefits, there is need for wider research into the indirect effects of demand for energy crops on deforestation and food prices.

The Review, which was commissioned by the Department for Transport and chaired by the head of the Renewable Fuel Agency Professor Ed Gallagher, will also call for a clear distinction to be made between "first generation" biofuels derived from food crops such as corn, palm oil and soya, and "second generation" biofuels made from waste organic matter and non-food plants such as algae and jatropha which would theoretically be grown without eating into land used for food production.

A government official familiar with the Gallagher Review told the newspaper that the report's findings raised the prospect of sustainability criteria being introduced to distinguish between different types of biofuels. "Simply setting a target without stipulating what kind of biofuel is to be used in what circumstances can have all sorts of unintended consequences," he said.

Another official added that the review has also "thrown up the likelihood" of UK and EU targets being readdressed.

The first such target is already in place with all petrol and diesel currently sold in Britain required to contain 2.5 per cent of biofuels. The UK is expected to increase that target to five per cent by 2010, while the EU is considering imposing a 10 per cent target by the same date. The government will now face increased pressure to rethink, or even drop, all these targets if clear sustainability criteria cannot be developed.

Speaking to BusinessGreen.com, A spokeswoman for the European Biodiesel Board (EBB) said that the industry urgently needed clarity on the future of the EU's biofuel targets. "We are aware the 10 per cent target is under attack in Brussels and that is a major cause of concern because the industry has worked with this target in mind, " she said. "We need targets that are binding if we are keep investor confidence."

She added that the EBB agreed with sustainability criteria in principle, but warned that these had to be "pragmatic" and should apply to other sectors as well as biofuels. "If you are serious about protecting biodiversity you can't apply sustainability criteria just to biofuels, the food industry needs to be included too," she said. "For example, biofuel accounts for just three per cent of the palm oil imports into Europe."

Increased demand for palm oil has been frequently cited as a prime example of biofuel's negative impact on the environment, with critics claiming that swathes of Indonesian rain forest are being felled to make way for palm oil plantations, undermining any carbon savings that would come from the biofuel.

The spokeswoman added that while the industry was working hard to develop so-called second generation biofuels, the EU's targets were unlikely to be met without the use of established biofuels as well. She added that if sustsinability criteria was to be introduced they should be modelled on proposals currently being considered in Brussels that are based on impact on biodiversity and the level of carbon savings delivered and as such would not ban all biofuels based on food crops.