The gap between rich and poor in Britain narrowed "remarkably" between 2000 and 2005 but the country remained one of the most unequal in the developed world, the Organisation for Economic Cooperation and Development said yesterday.

The UK's growth in wealth equality has been the fastest among the world's 30 richest and most developed countries. But in 2005, when the organisation compiled its latest data, the UK remained a more unequal society than three-quarters of OECD countries, with the richest 10% earning nine times more than the poorest 10%.

Income inequality in the UK grew steadily from the mid-1970s and only dipped briefly in the mid-1990s, the OECD said.

"We found it starts narrowing from the year 2000," said Mark Pearson, the head of the OECD's social policy division. "It is really quite a remarkable reduction since then - the largest fall in all developed countries, at a time when inequality has been rising in most developed countries."

But in 2005, the earnings gap between rich and poor was still 20% wider than in 1985. And in the years since 2005, which are not covered in the study, the narrowing of the wealth gap appears to have flattened off, Pearson added.

Last month the prime minister admitted that "social mobility has not improved in Britain as we would have wanted", but added: "Poverty has been reduced and the rise in inequality halted."

The increase in inequality in developed countries "has not been as spectacular as most people probably think it has been", Pearson said. "This difference between what the data shows and what people think no doubt partly reflects the so-called Hello! magazine effect. We read about the super-rich, who have been getting much richer and attracting enormous media attention as a result."

He said a combination of economic growth, which had lifted more people out of unemployment, and redistributive fiscal policies had been responsible for much of the change.

"In the five years since 2000 things have gone in the right direction and the poor have done very well from employment growth, the much-maligned tax credit system and the minimum wage, with the effect of redistributing wealth," he said. Between 2000 and 2005, incomes for the top fifth of earners grew by 1.5% in real terms each year, while for the bottom fifth they grew by 2.4%.

But Pearson stressed the long-term trend remained towards greater inequality in the UK when measured by disposable incomes. "We are talking about a blip downwards and over the last 30 years there has been a very rapid increase in inequality," he said.

The report also found that in the UK new generations struggle to escape the income levels of their parents more than in almost any other country in the group.

"There is less social mobility in the UK than in Australia, Canada and Denmark. In this respect it is similar to the United States and Italy," said the report. "What your parents earned when you were a child has much more effect on your own earnings than in more mobile countries." James Purnell, the work and pensions secretary, welcomed the findings as evidence that the government's employment policies were working.

"We have seen a decline in the rate of people not working by 4% - one of the highest rates in the OECD - as people have made the most of the opportunities afforded to them by our flexible labour market," he said. "As a consequence we have helped cut the numbers on out-of-work benefits by over a million. There is a common and understandable criticism that too often parents' earnings determine their children's earnings. But what this shows is that we have one of the lowest levels of people in the poorest fifth, meaning that with most parents in a higher income bracket their kids follow suit."

Liberal Democrat work and pensions spokeswoman Jenny Willott said: "This government can take no pride in the fact that social mobility has not improved in the last 10 years or that the wage gap has increased between rich and poor. Pensioner and child poverty have both increased since 2005, a period this report does not cover. It is shameful that Labour's policies to tackle social mobility and poverty have completely stalled since 2005."

The latest findings run contrary to an Institute for Fiscal Studies report in January that found that "income inequality is currently at its highest levels since the late 1940s". According to the OECD's findings, inequality remains higher in the UK than in Germany, France, Belgium, the Netherlands and Scandinavian countries. The gap between rich and poor has grown in more than three-quarters of OECD countries over the past two decades.

Speaking at the report's presentation, Oxford University economist Anthony Atkinson said growing global inequality posed a new challenge to governments in a time of recession.

"What will happen if the next decade is not one of world growth?" he said. "With governments around the globe announcing trillions of dollars in rescue financing to shore up banks, I think that citizens of OECD countries are going to expect that if you can find funds to rescue banks, then governments can fund an effective unemployment insurance scheme, and they can fund employment subsidies".

Angel Gurria, the OECD secretary general, warned: "Growing inequality is divisive. It polarises societies, it divides regions within countries, and it carves up the world between rich and poor. Greater income inequality stifles upward mobility between generations, making it harder for talented and hard-working people to get the rewards they deserve.

"Ignoring increasing inequality is not an option."