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Pathfinder projects are now only allowed to refurbish housing and local authorities argue that this provides poor value for money. Contractors have also complained that this has forced them to raise prices because of extra risk.

Sandwell council in the West Midlands is leading the campaign. Dave Tatman, Sandwell's PFI manager, said it was in discussions with the DTLR over changing the rules so that new-build housing could be included in its £50m, 1680-property scheme.

He said: "We're finalising the argument and going back to report to it." Tatman claimed that it cost the council more to refurbish most houses than to demolish them and build new ones.

Other local authorities in the eight initial Pathfinder schemes, which last for 25-30 years, are also likely to be asked to join the campaign to change the rules. Tatman said that all the Pathfinder councils faced similar problems, and the only way to tackle them was to pull together.

The Pathfinder projects, first unveiled in 1999, have been delayed because of problems over money and the housing stock.

The other seven local Pathfinder authorities are: Manchester, Newham, North-East Derbyshire, Islington, Reading, Camden and Leeds.