A Commons committee has called for local authorities to be given more power over council tax rises.

In a report published on Friday, the committee on the Office of the Deputy Prime Minister called for central government to exercise less control over the decisions of town halls.

The MPs concluded that granting councillors greater flexibility on taxes would allow them to fund improvements in local services.

"Local councils must be given the freedom to raise local taxes for those services which their local communities deserve and demand," the report said.

But it also rejected calls for the council tax to be scrapped or replaced by a local income tax system.

Instead, it recommended a greater effort to ensure that members of the public take up the council tax benefits to which they are entitled.

"It is crazy. Lots of pensioners are upset about council tax increases, but many of them are throwing money away," said committee chairman Andrew Bennett.

"It is little short of scandalous that central government is saving over £1.2 billion of unpaid council tax benefit every year and that two million households are paying more than they should to local government."

Ministers are currently reviewing the system of local government finance, but are not believed to favour the wholesale scrapping of the council tax system.

And they have also insisted on exercising powers to limit the tax rises being sought by some councils.

But that decision has prompted one Labour MP to voice his frustration at the government's plans.

In a letter to Labour's chief whip on Thursday, Nottingham North MP Graham Allen said ministers had made a mistake in deciding to cap his local council.

"I'm writing to let you know that I will not be supporting the government in the voting lobbies on Monday July 19, 2004 when the order which brings in the council tax capping of Nottingham is debated  on the floor of the house,and that I intend to speak in the debate," he wrote.

Allen said the government had created the "ludicrous position of local council tax payers having to pay £250,000 or so to send out new bills in order to save £180,000 on the budget".

"The government's position is irrational,wanton and unfair on my constituents who are  being made to pay a price they can ill afford," he added.