Instead of the current system of flat-rate tuition fees, the report outlines a future in which universities could raise extra funds by setting their own charges for courses - in the form of so-called "top-up" or "flexible" fees.

In response, the government has re-iterated its opposition to the principle of top-up fees, which the Education Secretary David Blunkett once promised would never be introduced while he was in office.

Owain James says the proposals will mean a two-tier system

They argue that setting a different price tag on universities and individual courses will mean that students would apply on the grounds of affordability rather than their own ability.

And if fees for courses at universities such as Oxford and Cambridge were set at a much higher rate, they argue it would mean an even greater likelihood of social exclusivity.

Top-up fees cannot fail but to increase social exclusion.... How could the inevitable creation of a two-tier education system and the prospect of huge levels of debt do anything but worsen the problem?"

The report, commissioned by the Russell Group, representing the most prestigious universities in the United Kingdom, suggests that expensive and popular courses, such as medicine, could charge students up to four and a half times more than other courses.

Using a "base" fee of £1,000 per year for the cheapest course, this would mean students paying £4,500 a year for more expensive courses - or £13,500 over three years - not counting living and accommodation costs.

David Greenaway says the present system has not proved to be socially inclusive

Without the prospect of any major increase in government funding and with the expectation of a larger number of students, universities are seeking a way of increasing budgets.

Fairer system

Nicholas Barr, reader in economics at the London School of Economics and adviser to the report, said that flexible fees would allow for a fairer system than at present.

This would depend upon providing a more effective student loans system, he said, which would cover all expenses for fees and living costs and would be paid back as a proportion of earnings after graduation.

The extra funding for scholarships for poorer students would come from savings in the student loan system, to be achieved by removing the artificially low interest rate on student loans.

At present, Dr Barr argues that the funding system fails to deliver social inclusion in higher education and that it subsidises the least needy middle-class families by offering a valuable university education at an artificially low cost.

Under a system of flexible fees, he says "the milkman would no longer be paying for the degree of an old Etonian".

Bankrupt universities

Although the government has so far been steadfastly opposed to top-up fees, Dr Barr predicted that financial pressures - and the threat of universities going bankrupt - will force the government to re-consider and accept the need for flexible fees.

The report was commissioned by the so-called Russell Group of top universities. It is likely that they will be divided over the report.

A meeting to debate its contents due to be held in the autumn.

The students' union at Oxford University has expressed its "outrage" at the proposals and has called on the university to speak out against top-up fees.

The Committee of Vice Chancellors and Principals, which is holding its own inquiry into funding, has so far refused to be drawn into supporting or opposing top-up fees.

In response to the report, the organisation for university chiefs said that debating such specific approaches to funding was "premature".

The Conservative party has also opted to keep an "open mind" on the report, with the promise of unveiling its own policy on higher education later in the year.