One in four web traders do not know about laws that protect consumers shopping online a government report has warned.

The internet shopping study from the Office of Fair Trading (OFT) also found most web shoppers do not know that they have cancellation rights when shopping on the internet under the Distance Selling Regulations (DSR).

Such ignorance is exacerbated by businesses not educating their customers about DSR law because they are also unaware of their obligations to shoppers.

The DSR regulations give extra protection to consumers who purchase goods and services without face-to-face contact with the trader. The report also said some businesses could also do more to address consumer concerns about privacy and security.

Online shopping has had a profound impact on UK retailing in just a few years. By enabling businesses to sell and shoppers to buy products from anywhere in the world at any time it brings huge benefits to millions of consumers and thousands of businesses.

The UK online retail market has grown so rapidly over the last three years it is now estimated to be worth more than £21bn. Over 20 million people shopped online last year with nearly a third spending more than £1,000.

However, the OFT also warned that the anonymity, speed of change and borderless nature of the internet can pose particular challenges for the enforcers of shoppers’ rights; this coupled with security issues such as online fraud puts many people off shopping online.

The watchdog said new developments in the powers, roles and relationships between enforcers will provide an opportunity to bring more co-ordination to how they can overcome these problems.

It has, however, called for the laws that protect online shoppers to be overhauled in some areas particularly in regard to online auction sites. It pointed out there is some uncertainty as to whether the DSR applies in some cases, although an ongoing EC Review may help to resolve this.

The OFT also believes there could also be scope to improve the quality of information provided to consumers by extending advertising self-regulation to websites. We will explore with the Committee of Advertising Practice whether their remit could be extended to cover websites.

Measures over the next six months will include ensuring businesses have easy access to clear information and advice about selling online, improved compliance and enforcement to make it safer to buy and sell online.

The OFT will also try to build consumer confidence in online shopping and give advice on how to protect themselves against security and privacy threats online.

John Fingleton, OFT chief executive, said: "The internet has added a welcome new dimension to competition in the economy, as well as providing convenience for shoppers and new opportunities to compare prices and find new products.

"However, if online shopping is to continue to flourish, the awareness and the protection of consumer rights need to improve.