Fraud investigators have dropped their inquiry into whether a firm which supplies water in the region deliberately misled regulators about its failure to meet customer service standards, it has been announced.

The Serious Fraud Office (SFO) said there was insufficient evidence to proceed with a criminal prosecution against Southern Water following an inquiry.

Inconsistencies in the reporting of service standards to the industry's watchdog Ofwat were found by the firm's new management team in October 2005.

The inconsistencies related to response times for billing inquiries and service complaints from customers, prompting the new management team to alert Ofwat which subsequently brought in the SFO.

It emerged that as a result of the failures, the firm may have failed to pay customers compensation, as water utilities are required to do if they fall short of standards under the industry's Guaranteed Standards Scheme.

Les Dawson, Southern Water's chief executive, said today: "We launched a joint inquiry with Ofwat, bringing in a specialist team of independent investigators from KPMG to look at inconsistencies relating to the reporting and handling of response levels to customer inquiries and complaints.

"Information gathered during the course of this independent inquiry was passed to the SFO, who reviewed the matter. However, we have now been informed that they do not intend to pursue it."

Southern Water provides water supply and wastewater treatment to about two million customers in Kent, Sussex and Hampshire.

An SFO spokeswoman said: "We can confirm that this investigation has been discontinued. The reason for that is that there was insufficient evidence to proceed with a criminal prosecution."

Mr Dawson said a new £20 million billing system introduced in February would help deliver an improvement plan over the coming year to raise customer service standards.