Britain's leading fashion retailers are threatening to boycott Australian wool from sheep farmers who use the controversial practice of "mulesing" amid animal cruelty concerns. The move follows an announcement that Australian wool producers have abandoned a promise to phase out the procedure by next year.

Next and Marks & Spencer are among major chains to condemn the decision as "totally unacceptable," and have pledged to seek wool from non-mulesed Australian sheep, or from other countries.

Mulesing involves cutting off the skin around the buttocks of merino lambs, often without anaesthetic, to prevent "flystrike", the infestation of blowfly maggots, which thrive in the folds of the sheep and eat into its flesh.

Wool farmers promised six years ago to phase out mulesing by December 2010 after threats of a global boycott, following a campaign by animal rights activists Peta, the US-based People for the Ethical Treatment of Animals. Now, Australian Wool Innovation (AWI), the research and development body for the country's wool industry, has said it is "unlikely" farmers will meet the target because alternatives to mulesing are not yet viable or cost-effective.

According to latest figures, around three-quarters of merino lambs – prized for their soft fleece – are mulesed at a few weeks old, about 20 million animals. Traditionally, this is conducted without pain relief, though the industry is now introducing local anaesthesia amid fears of a worldwide movement against it.

The British Retail Consortium said it was "disappointed" at the announcement. "Following consultation with the RSPCA (UK), BRC members will, until the end of 2010, seek wool from suppliers who provide flocks with pain relief when mulesing. After this date, they will seek to use suppliers who don't use mulesing – even if pain relief is provided."

The Australian National Farmers' Federation said mulesing remains the most "effective practical way to eliminate the risk of flystrike". Without it "up to three million sheep a year could die a slow and agonising death". The Australian RSPCA has accepted it as a necessary procedure, and the AWI said research showed without mulesing the risk of flystrike was 40-100%, while mulesing reduced it to 1-3%.

Clip mulesing has recently been introduced, where tight plastic clips cut off the blood supply to the sheep's skin around the buttocks causing the flesh to eventually fall off. But this, while said to be less painful, is still not acceptable to retailers. "Next has expressed a preference for using non-mulesed and non-clip mulesed merino wool," said a spokeswoman. "As a result, Next will continue to source wool from Australia and other countries providing the welfare of the livestock is managed in line with our position statement." Its 2009 autumn collection has been sourced outside Australia, she added.

The industry is looking at a genetic solution, breeding wrinkles out of the sheep to produce lambs with a smooth, wool-free backside, known as "bare breech".

Marks & Spencer has pledged to use only non-mulesed merino wool for suits in its menswear range after 2010. In a letter to Australian wool industry leaders, the high street store is said to have stressed the "2010 deadline is not negotiable and loss of confidence in M&S wool products could well lead to widespread customer boycotting and loss of revenue for the whole supply chain". Other retailers to have voiced concerns include H&M, Hugo Boss, Nike, Gap and Liz Claiborne.

Australia is the world's largest wool producer, with about 80% of exports going to China. Italy is Europe's leading importer. One major Chinese importer, the Sunshine Group, has now demanded an end to mulesing, threatening Australia's status and offering opportunities to wool producers in South Africa, South America and New Zealand, – where the practise is not used.

"AWI have had six years to stop this horrific practice. If it does not meet the 2010 deadline retailers around the world can be expected to take action by sourcing wool elsewhere," said Poorva Joshipura, Peta's European director of special projects.

AWI has said it has no power to impose the deadline, which was unlikely to be reached for "welfare reasons, based on scientific grounds", and that sheep would suffer as a result. The industry remained "committed", however, to phasing out mulesing. In the meantime, significant welfare advances had been made to lessen discomfort for the lambs, with clips, anaesthesia and in the surgical practise of mulesing, it said.

Mulesing: the horror behind the high street

Mulesing was devised by Australian farmer John Mules in the 1930s and is widespread in the country.

Sheep are susceptible to the Lucilia cuprina blowfly, attracted to urine and faeces caught in the fleece around the buttocks. Heavily wrinkled Merino sheep are particularly vulnerable.

The larvae thrive in the sheep's skin folds and burrow into the flesh of the animal, causing death in some cases.

Lambs are usually mulesed when a few weeks old. The procedure involves slicing off skin in a crescent shape from each side of the buttocks.

Animal rights activists claim it takes four weeks for wounds to heal, causing pain and distress to the sheep.

Animal rights campaigners also claim mulesing would be unnecessary with improved animal husbandry.

Research is being carried out into intradermal injections, the injection of a compound which causes necrosis of the skin, leaving a scab which eventually falls off to reveal smooth, wool-free skin.

Research is also under way into new blowfly controls and genome mapping of the sheep blowfly.