Counterfeiting gangs based in China are producing sophisticated copies of the world's bestselling pharmaceuticals. In 2008 an estimated 8m of these potentially deadly pills found their way to NHS patients. The health of millions of people is at risk

They were made in China, labelled in French and then shipped to Singapore. They ended up in Liverpool and from there were sold straight into the heart of the NHS. As the criminal investigation continues into how a fake consignment of Zyprexa, an anti-psychotic treatment prescribed for schizophrenia, infiltrated Britain's healthcare system last year, evidence is mounting that sophisticated counterfeiting syndicates are increasingly targeting Britain's network of high-street chemists, hospitals and GP surgeries.

Figures collated for the first time reveal that British border officials seized more than half a million counterfeit pills destined for the NHS and high-street chemists last year, an amount equal to the quantity of counterfeit drugs found in the whole of Europe in 2005. So vast is the scale of the threat from fake medicines that public confidence in the NHS could be "completely undermined", according to legal experts. Health officials also warn that the health of millions of Britons is potentially at risk.

More than £3m of fake life-saving medicines for ailments such as heart disease and cancer were intercepted by customs officials and the Home Office border agency in the first 10 months of 2008. Three consignments were each larger than 100,000 pills.

In response, customs has upgraded tackling the trade in fake medicines to "high priority", the same urgency devoted to targeting heroin and cocaine dealers. Interpol recently revealed it was investigating reports that profits from counterfeit drugs are funding terrorist groups, including al-Qaida. Others warn that smuggling counterfeit drugs into Britain's healthcare network could prove to be a terrorist weapon in itself.

Latest government intelligence indicates that criminal gangs operating largely out of China have shifted away from selling fake "lifestyle" drugs such as Viagra on the internet and are now concentrating on supplying counterfeit "life-saving" medicines to the NHS. Profits are potentially greater, with the high price of medicines in the UK ensuring that it has emerged as a prime target for criminals, according to the government agency that oversees the safety of medicines, the Medicines and Healthcare Products Regulatory Agency.

Mick Deats, a former Scotland Yard detective chief superintendent who heads the agency's intelligence and enforcement unit, said: "Criminals are branching out and we are seeing counterfeit drugs that treat prostate cancer, for example, moving into the healthcare system." Covert monitoring of email traffic, "computer forensics" and telephone calls pinpoint China as the principal hub for the manufacture of Britain's counterfeit medicines. The Observer has learned that Chinese police authorities recently travelled to London to discuss the growing problem.

Deats said all available evidence confirmed a sharp growth in the trade of counterfeit drugs. Major recalls of fake medicines have been ordered by the agency on 14 occasions in the last three years, compared with just one in the previous decade. In addition, four criminal investigations are proceeding into fake treatments found within the official healthcare supply chain. Among them are the consignment of Zyprexa, 40,000 doses of Casodex, a hormone treatment for men with advanced prostate cancer, and Plavix, a blood thinner. Yet the British authorities admit it is impossible to calculate the quantity of fake medicines entering the UK or their potential health impact.

Graham Satchwell, the former head of Scotland Yard's organised crime group, who has spent years investigating the counterfeit drugs trade, believes significant numbers of Britons may already have died as a result of fake medicines. Although no deaths from counterfeit drugs have been recorded, Satchwell said the very nature of fake medicines meant patients may have died without counterfeit drugs being blamed. "They may have less of the active ingredient, meaning people could die because they are not receiving their life-saving treatment. Even now, though, healthcare professionals never assume it is the drug. No one asks whether deaths are attributable to fake medicines," said Satchwell.

However, forensic examinations of fake treatments have revealed toxic impurities such as anti-freeze and tiny amounts of the active ingredient, if there are any at all.

The size of the problem facing the NHS is now so great that Interpol's secretary-general, Ronald Noble, opened an anti-counterfeiting conference in Africa recently by admitting to being "shocked" at discovering that fake drugs were more deadly than terrorism. Forty years of terrorism, he said, had killed 65,000 people, compared with 200,000 in one year alone in China from counterfeit medicines.

At what is described as the largest trade fair in the world, thousands of foreign buyers flock to southern China twice a year to order the country's latest exports. Now Canton Fair, Guangzhou, has come to the attention of the British police, following claims that criminal gangs are placing huge orders for counterfeit drugs destined for the UK.

Thousands of firms are currently engaged in China's new growth business. Experts admit they cannot always spot fake drugs in packaging made using state-of-the-art printing and blisterfoil machines. Recently the manufacturers of an anti-malarial drug added a hologram to its blisterfoil to beat the fakers. Within a month, criminals had successfully replicated their efforts.

From China, the fake medicines head west, typically passing through the transit point of Dubai, then the porous borders of Europe. Here the route becomes increasingly opaque. Intelligence reports from the medicines agency show that a single consignment of drugs can change hands up to 30 times before it reaches a British high-street chemist. With frequent repackaging taking place, detection of fake goods is notoriously difficult, with police admitting that odds are weighted in the criminals' favour. Research last month confirmed that just 0.1% of goods entering the UK are physically inspected by customs officers, suggesting the 500,000 intercepted in 2008 is likely to be a fraction of the true picture. The National Audit Office believes that the UK is one of the easiest places in the EU to smuggle counterfeit goods, due to a lack of checks. Once within the UK, drugs are distributed via Britain's network of pharmaceutical wholesalers. Satchwell said that cash-conscious NHS trusts were encouraged to buy drugs as cheaply as possible.

Satchwell, a former director of security at GlaxoSmithKline, added: "There are hundreds of dealers, and they are selling drugs as legitimate and genuine materials. Once it has been sold to the dealer, it can go anywhere in the NHS." Even double-checking batch numbers is no defence, with medicines agency investigations revealing that details of legitimate batch numbers have been copied in China's counterfeiting factories.

Deats said NHS trusts should avoid deals that looked too good to be true. "The message is that if you are offered medicines from an unusual source at an unusual price from an unusual country, chances are there is something wrong with them," he said.

British investigators have found Casodex, whose wholesale price is £128 for a pack of 28 pills, being offered by Chinese gangs for less than £5.

John Newton, intellectual property rights manager for Interpol, said: "Criminals use existing supply chains. It's very hard to detect." Interpol's latest profiling describes the modern organised criminal as "like a commodities broker" rather than the stereotyped shadowy underworld figure. A shipment that successfully penetrates the UK supply chain can lead to profits in excess of £1m.

"They can make four times the money and only risk a fine. Penalties don't reflect the nature of a crime that can kill people," said Gary Noon, chief executive of Aegate, a British firm that has introduced a bar code to determine whether a pharmaceutical is authentic. Of the fake batches known to have infiltrated Britain's healthcare system, some include the cholesterol-reducing treatment Lipitor. Three years ago 2,523 packs of fake Lipitor were sold in Britain. Details obtained under the Freedom of Information Act reveal that only 359 of those packs were ever recovered.

The nightmare scenario is that a batch containing lethal substances will one day penetrate the NHS. Last year EU customs officers intercepted counterfeit drugs containing brick dust with yellow paint and furniture polish. In the developing world, mass casualties are already frequent. More than 13,000 children in China were treated following release of a tainted batch of infant milk formula, while scores of youngsters died in Haiti after swallowing paracetamol cough syrup containing toxic diethylene glycol.

Yet quantifying the threat to Britain remains impossible, according to the medicines agency. The World Health Organisation estimates that up to 1% of prescriptions in the developed world a year are fake, equating to around 8m in Britain. Deats believes the true UK figure is significant - in the millions - but potentially smaller. Yet the growth in trade is increasingly a concern. Hundreds of counterfeit factories have been shut down in China, yet the output of fake drugs has grown. Noble recently cited research that global counterfeit drugs sales will rise to more than $75bn by 2010, a 90% increase in five years. The United Nations drug control board believes trafficking and abuse of prescription drugs has overtaken the use of all illegal narcotics except cannabis.

In the short term, the European commission is considering introducing new rules, such as banning the repackaging of medicines and the mandatory use of special seals to stop counterfeiters. In addition, companies such as Aegate have opened discussions with the NHS over the implementation of their bar codes to determine whether a drug is genuine, following successful trials in Europe.

But as long as criminals can harvest enormous profits, British patients will remain vulnerable. "The counterfeiters target the weakest members of our societies - the young, the sick, the economically disadvantaged, and it is our obligation to take action," said Noble.