A landmark legal case by families of disabled children disabilities against a pharmaceutical giant is likely to be abandoned after legal aid was withdrawn.

The families say Sanofi-aventis, manufacturers of anti-epilepsy drug Epilim, taken by mothers while pregnant, should pay compensation because their children's conditions resulted from the medication.

But the government's Legal Services Commission, which is believed to have provided more than £3m to help the families prepare for the action, decided to end its financial support just three weeks before hearings were due to begin in the high court in London.

The families' lawyers said the "bitterly disappointing" decision had probably forced the abandonment of the action, which could have potentially paid out tens of millions of pounds in compensation. One family accused the commission of causing "a complete waste of time and money".

The commission told its solicitors, Irwin Mitchell, on 26 October it was pulling out. It told the Guardian: "Legal aid is no longer funding an action against the makers of the drug Epilim. However, because proceedings are still ongoing we are unable to comment further."

A senior Liberal Democrat, Sir Menzies Campbell, is to press the justice secretary, Ken Clarke, to review the decision.

The case, in preparation for six years, has been brought by families of 100 children. They allege the children were damaged in the womb because their mothers had taken Epilim, the brand name for a drug whose active ingredient is sodium valproate. The drug is used to treat and reduce the risk of seizures in people with epilepsy, although the company says it is not a first-choice treatment for women of child-bearing age.

The focus in the court case would have been on 10 of the children. The lawyers say they represent families of a further 169 children, who they claim also suffered deformities as a result of their mothers taking Epilim.

The case might have resulted in one of the UK's most significant medical compensation packages since thalidomide. It is thought to be the first made against a pharmaceutical company under the 1987 Consumer Protection Act, governing companies' responsibility for the safety of their products.

The families did not seek the banning of sodium valproate, which has been on sale since 1972 and has been the subject of warnings over its use by researchers and medicine safety advisers. They were prepared to recognise its importance in controlling epilepsy, but maintained its manufacturers had been slow to issue warnings over possible side-effects.

The action against Sanofi-aventis will be formally completed if the families withdraw their case in court on 15 November.

David Body, head of medical law at Irwin Mitchell, said the news was disappointing and it was likely the claim would have to be discontinued.

"This is a case which we were ready to fight in which there were real clinical and legal issues at stake – both for our injured clients and for consumers generally – so far as prescription drugs are concerned," he said.

"The medical and scientific community first identified and reported on the effects of sodium valproate – Epilim – as long ago as 1980. Thirty years on from that first report, it now seems that this case cannot go ahead to explore the reasons why these children have been injured. If the courtroom door is closed against those children, I think sanofi-aventis should take responsibility for the effects of its drug and compensate the children injured by it, in line with the social contract that it sees as the centre of its business strategy.

"Until Sanofi does recognise this responsibility, the cost of caring for the children its drug has injured will continue to be borne by the families of those injured children, living with the after-effects day to day, and by the taxpayer through benefits, social care and the cost of special education. The challenges that each of these families face will never go away."

Sanofi-aventis said it had sympathy for the claimants but that it had always believed the case would fail.

"Sodium valproate remains the most effective treatment of generalised epilepsy and for many patients it is the only medicine that will effect adequate seizure control," it said.

It had "always provided appropriate precautions and warnings on the risks associated with possible side-effects of this medicine, including possible risks to the unborn child, in line with developing scientific knowledge."

Sodium valproate was not recommended as a first choice for women with epilepsy of child-bearing potential, it added. "The benefits and the risks of anti-epileptic therapy in women of child bearing potential must be carefully evaluated."

The company said it supported research on the risks and benefits of sodium valproate in all patients.

Campbell said a family in his constituency of North East Fife was involved in the legal action. "These cases demonstrate terrible tragedy for those who have been affected. It would only be right and proper for a review to be carried out to see whether it is possible to give the plaintiffs financial support to pursue their action."

The charity Epilepsy Action claimed women and unborn children continued to be at risk. Its deputy chief executive Simon Wigglesworth said: "Women of child-bearing age are still prescribed sodium valproate without receiving vital pre-conception counselling to help them decide whether it is the right drug for them.

"National guidelines state that women with epilepsy of child-bearing age should receive pre-conception counselling. We conducted a survey in 2007, which showed that only 21 per cent of women are actually receiving this counselling. We estimate that as many as 1,200 babies born to women taking sodium valproate are being put at risk every year in the UK.

"Around 5,000 women with epilepsy become pregnant every the year in the UK. The majority of women will experience uncomplicated pregnancies and give birth to healthy babies. Women should never stop taking epilepsy medication without consulting their doctor as this could be potentially harmful to their health and their unborn child."

The government's drug regulator, the Medicines and Healthcare Products Regulatory Agency, said it was widely recognised that women who took anti-epilepsy drugs during pregnancy had "a higher risk of having a child with a birth defect than women in the general population – it is estimated that the risk is two to three times higher".

Thalidomide was developed as a sedative in Germany in the 1950s and was prescribed for pregnant women with morning sickness. In the UK about 2,000 babies were born with birth defects to mothers who had taken the drug and there are currently more than 450 thalidomide survivors in the country. The drug was marketed by Distillers, now part of the Diageo group, until it was voluntarily withdrawn in November 1961.

A famous Sunday Times campaign in the 1970s helped families win a compensation deal in 1973. A trust administers payments in the UK and in January the government offered a formal apology as well as a new £20m compensation package.