However, service stations would be allowed to sell blends that are up to 5% ethanol without labelling the fuel as a blend, the government said.

The government says it wants to encourage a viable biofuels industry to help offset fluctuations in oil prices.

But the report found that the target would not be met unless further policy initiatives were undertaken.

The Industry Action Plans to be developed at next week’s meeting between the prime minster and the oil companies will set out actions required to meet the 350 megalitre target by 2010.

“The Australian government will work with oil companies, petrol retailers, consumer groups, the biofuels industry and car manufacturers to ensure achievements of the target by 2010,” said Howard.

“The deputy prime minister and I will meet oil companies next week to commence the development of industry action plans.”

But the deputy prime minister, National Party leader Mark Vaile, spoke more strongly, warning the refiners that if they did not voluntarily sign up to plans to boost biofuel use they could face a mandated requirement to blend up to 10% ethanol in petrol. Blending of biodiesel with diesel fuels could follow.

Government and industry agree that consumer confidence in biofuel blends was critical to the success of any move to boost biofuel production.

Federal assistant treasurer Mal Brough this morning told Channel 9 that the Labor Party had damaged public confidence in ethanol-blend petrol through a scare campaign in 2002.

"The Government needs to work with the public, with the oil companies and of course with biofuel manufacturers to restore that confidence," Brough said.

"Part of that will be ensuring we have testing of motor vehicles so that you can be reassured by the manufacturers that using a 5 or 10% blend won't damage your particular vehicle."

However, in 2002 blends that were substantially higher than 105 ethanol were sold unlabelled at many serivce stations in Sydney and Wollongong, and were generally agreed to have damaged engines. the ethanol in the blends was produced by Manildra, which had conated generously to the Liberal Party.

Brough declined to state that no car would be damaged by using ethanol-blend petrol.

"That's exactly why we have to do the testing," he told Channel 9.

Car manfacturers were continuing to call for a maximum of 5% ethanol content in petrol blends. Federal Chamber of Automotive Industries CEO Peter Sturrock warned that blends with higher levels of ethanol could damage vehicles.

But Holden said it believed that E10 fuel (10% ethanol) would not harm its new vehicles, although blends with more ethanol would be damaging and would void warranties.

Manadated fuel blending was supported by the Australian Medical Association, which called for binding target of 10% ethanol in petrol and 20% biodiesel in diesel. This would "benefit our health without damaging our cars", said AMA President Mukesh Haikerwal.

The government's report offered evidence to support this stance.

It found that replacing petroleum with ethanol reduced air pollution and health problems more than at first thought, while greenhouse and regional benefits were similar to previous research undertaken.

To further assess the benefits of biofuels, the government would commission a study into the health impact of ethanol under Australian conditions. It would also promote biodiesel’s environmental benefits, such as its biodegradability, through a biodiesel trial in Kakadu National Park.

Howard said the meeting with industry would also address high fuel prices.

The government also announced changes to fuel labelling and the increased use of a 10% blend of ethanol in the commonwealth vehicle fleet.

In addition, the report recommended the government work with fuels and transport industries to establish standard forms of biodiesel for the market and work with states and territories to adopt fuel volatility standards.

This package was announced in addition to the government’s 50% excise concession for alternative fuels, a $37.6 million capital fund to support new biofuels production capacity and a total of $41.2 million in production grants to fuel ethanol producers.