Poor regulation in Britain's overseas territories risks serious damage to the UK's reputation in the global financial system, Parliament's public finance watchdog said today.

The Commons public accounts committee (PAC) noted that the Foreign Office had accepted the evolution of territories like Bermuda, the Cayman Islands and the British Virgin Islands as tax havens, as a way of diversifying their economies.

But it said that the territories' financial services lack the investigative capacity fully to tackle problems like money-laundering, and warned it was "complacent" for UK authorities to allow them to manage the risks alone.

The committee called for the Foreign Office and UK crime-fighting agencies to bring in more investigators and prosecutors to bolster regulatory efforts in offshore financial centres for which Britain has responsibility.

The report came as the Commons Treasury committee announced its own inquiry into offshore centres, which will look into whether they have contributed to international financial instability.

Seven of the UK's 14 overseas territories have offshore financial centres, with major operations in Bermuda, the Cayman Islands and the British Virgin Islands and smaller centres in the Turks and Caicos Islands, Montserrat, Anguilla and Gibraltar.

Today's PAC report warned: "The UK's reputation in the financial services industry is linked to how well its territories perform against international standards.

"The (Foreign Office) and its governors have a key role in protecting the UK from serious reputational risks and possible financial liabilities by ensuring that global standards for banking, insurance, securities and defences against money laundering, to which the UK has signed up on the Territories' behalf, are being met."

A recent report by the National Audit Office found the territories to be "lacking regulatory capacity", with the Turks and Caicos Islands, Montserrat and Anguilla in particular "increasingly struggling to meet rising international standards", said the committee.

IMF assessments found lower levels of compliance with global standards on money-laundering, banking, insurance and securities in the territories - with the exception of Gibraltar - than in the Crown Dependencies of Jersey, Guernsey and the Isle of Man.

And the most recent figures show just two successful local prosecutions for suspicious financial activity in the Caymans, and none in the other territories.

Regulators in Bermuda, the Caymans and the British Virgin Islands had achieved "major improvements" since 2000, funded by new abilities to levy fees from their growing financial sectors, said the report.

But it warned it was "improbable" that the Foreign Office's deployment of a single specialist to advise territories in the Caribbean was "sufficient to address the scale of the risk".

PAC chairman Edward Leigh said: "The Foreign and Commonwealth Office is not doing enough to manage the risks arising from the UK's liability for the 14 overseas territories choosing to remain under British sovereignty.

"In most of the territories, the standards of regulation across areas such as banking, money laundering, insurance and securities are not as good as those in the Crown Dependencies.

"The FCO, actively supported by other relevant agencies, must do more to help the territories, especially the smaller ones, strengthen regulation. Where necessary, this should include bringing in more UK investigators and prosecutors."

The report also warned that standards of governance and financial reporting in the territories' administrations were "variable" and in some cases fell below what was acceptable for a UK local council.