Local dispensing pharmacies are to be protected from competition by large supermarkets, under proposals announced by the Department of Trade and Industry.

The government has rejected the proposals by the Office of Fair Trading (OFT) that would have led to a deregulation of the pharmacies market. The OFT report published earlier this year recommended that restrictions on the number of pharmacies in any one area be lifted.

OFT said it would mean that customers got a better deal - but many small pharmacies said the changes would mean the end of their businesses. They predicted that supermarkets would take the opportunity to open more in-store pharmacies, forcing the closure of thousands of smaller chemists.

The government's proposals include a number of exemptions that would allow pharmacies to operate without having to go through the usual licensing system.

Pharmacies intending to open up in large shopping centres and those that remain open for more than 100 hours a week will be exempt.

Trade and Industry Secretary Patricia Hewitt said: "Taken together, we believe the measures" comprise a balanced package that will continue to raise standards for patients, will support the needs of small businesses, and will do so without jeopardising the vital role played by community pharmacies particularly in poorer and rural areas."

Campaigners welcomed the government's decision to reject the OFT proposals but raised concerns about the exemptions. The Chief Executive of Pharmaceutical Services Negotiating Committee, Sue Sharpe said: "[We] are concerned that by proposing substantial exemptions from the entry controls the government's proposals could amount to de-regulation by the back door."