Water companies are at the centre of a major investigation by the financial and environmental watchdogs after they admitted they may have illegally released untreated sewage into rivers and waterways.

The Environment Agency and Ofwat investigation will involve more than 2,000 sewage treatment works, with any company caught breaching their legal permits facing enforcement action, including fines or prosecutions.

Fines can be up to 10 per cent of annual turnover for civil cases, or unlimited in criminal proceedings.

The EA asked water companies to fit new monitors at sewage treatment works to make sure the right levels of wastewater are being treated before overflows are allowed to enter the environment.

Following this, several water companies have now revealed that many of their sewage treatment works may not be compliant, they said.

Emma Howard Boyd, chair of the Environment Agency, said: “Any water companies in breach of their permits are acting illegally. This is a major issue of public trust. Water company boards must certify every year that they have adequate resources to fulfil their regulated activities.

"Only now, just before new monitors are installed, have companies reported concerns over potential problems."

She added: “The private sector is under increasing pressure to demonstrate tangible commitments on protecting the environment. This shows why we need robust and well-funded regulation to provide the public, investors and customers with assurances about what is being delivered on the ground.

"I would like to see the levels of penalties for corporate environmental crime in England go up significantly. More attention should also be paid to the directors of companies that are guilty of repeated, deliberate or reckless breaches of environmental law. Such directors should be struck off and in the most grievous cases given custodial sentences.”

Ashley Smith, Chair of Windrush Against Sewage Pollution, a campaigning group seeking an end to water industry pollution, said the crackdown was welcome "but what it actually amounts to remains to be seen".

He said: "It is interesting to see the Environment Agency shamelessly claiming to have discovered what has already been spectacularly exposed in the media by the analytical work of Windrush Against Sewage Pollution campaigner Professor Peter Hammond.

"Now will we have to watch, unenlightened for a very long time, as an opaquely led agency, which claims to be so under-resourced that it cannot even deal with a tiny fraction of offences, wrestles with something of this magnitude?"

He added: "On Friday Thames Water is set to be sentenced at Aylesbury Crown Court for yet another pollution, this time at Oxford, but it has taken over five years to finalise, even though the company is pleading guilty.

"This lengthy timescale is typical and we would be fascinated to hear how Environment Minister Rebecca Pow rationalises this ridiculous delay as anything but a green light to keep on polluting.

"In the meantime, Oxford Sewage works has been polluting on an epic scale, appears to have been doing so illegally on many occasions and continues to do so unchecked; a common story across the UK."