The following correction was printed in the Observer's For the record column, Sunday October 11 2009

In the article below an editing error led to our claiming that 400,000 people pass annually through Hammersmith bus station and the Tower Bridge museum, where new Hydrachill water fountains are to be trialled. That should be 4 million and 400,000 respectively.

London may soon follow in the footsteps of Bundanoon, the Australian town that last week banned bottled water and set up drinking fountains for thirsty locals.

The capital's first water stations will be set up this month in a move that could have serious repercussions for the £1.5bn-a-year bottled water industry, with companies finding it increasingly difficult to justify their carbon footprint as the quality of tap water improves.

Thames Water, Britain's largest privatised water company, with 13.6 million customers, has had talks with the Greater London Authority and Transport for London to install water machines in the capital. In the first trial, Hydrachills will be installed at Hammersmith bus station and at the Tower Bridge museum. The machines can fill bottles of up to 500ml with chilled water for a 20p charge. All proceeds will be donated to Waste Watch, a charity working to change the way people use natural resources.

Should London's water stations prove a hit with the 400,000 visitors who annually pass through the two sites, the scheme will be extended to underground, bus and railway stations across London and the south-east before the 2012 Olympics.

The move follows the installation last week of Hyde Park's first drinking fountain in 30 years. The mayor of London, Boris Johnson, was criticised for reneging on promises to install water fountains in the capital's parks, with Hyde Park his solitary success.

In his draft water strategy for London, Johnson says British tap water is "among the best in the world", but that misconceptions over its perceived healthiness encouraged people to buy bottled water. Tap water is a thousand times cheaper than bottled, which is more expensive per litre than petrol, he says. But Thames Water has been left to take up the mayor's pledge of more drinking stations, in a move that has upset bottled-water firms, which are fast losing the PR battle.

Activists say bottling water causes unnecessary use of plastics and fuel for transport and requires 2,000 times the energy required to produce tap water.

Hildon, regarded by many as the most exclusive bottled water, last week launched its second aggressive advertising campaign. In magazine adverts, fitness instructor Jonathan Goodair claimed tap water was only good enough to shower in and for "washing my kit". He claimed it left an "unpleasant taste".

In the summer, the company took out a 20-page trade magazine advertisement attacking tap water. Under the headline "Is it safe?" it said: "Cancer drugs found in tap water", adding : "Is there anything else they are not telling us?"

Water companies ignored the attacks, preferring to concentrate on promoting their own benefits. The Drinking Water Inspectorate's latest water quality report said Thames Water's tap water was 99.99% compliant with national and European standards – its best-ever performance. Average compliance across the industry remained at 99.96%.

Consumption of bottled water doubled in the 10 years to 2006, but since then sales have fallen. At the end of March, sales were down 12% on the year, according to researchers. Of 13 billion plastic bottles of all types sold in the UK last year, only a third were recycled.

Peter Antolik, of Thames Water, said: "Where once people may have felt obliged to order mineral water when out for a meal or a drink, they are now at ease asking for tap water. We're building on this achievement by trialling Hydrachill water stations, which we hope will soon be commonplace for carbon-conscious Londoners wanting to stay refreshed as well as cut down on cost and waste."