Britain's farmers should tackle the level of environmental damage caused by bad practices or face on-the-spot fines for the pollution they cause, a government watchdog has said.

The Environment Agency said the cost of unnecessary damage to the countryside from farming is now running at £500 million a year.

The call came with the publication of a new report, "Agriculture and natural resources: benefits, costs and potential solutions", which concluded that farmers needed better guidelines on good practice and called for government action on environmental protection.

The National Farmers' Union acknowledged that there was "room for improvement", but said it was important to recognise the many positive developments already taking place.

The Environment Agency estimated that the annual costs of agriculture to the environment amount to £1.2 billion, partly compensated for by benefits of up to £900 million.

It suggests that in the short term £331 million could be saved per year by adopting improved techniques, while over the longer term around £525 million per year could be saved.

The report says that current legislation on farming standards should be streamlined and was lacking in effectiveness.

"Existing legislation is not particularly wide ranging in its scope. Issues such as pesticides, phosphorus, pathogens, soil quality and soil erosion are notable absentees," says the report.

"Change is needed to bring regulations together under a simple, transparent framework. New legislation should be integrated into this single framework."

Calling for better environmental regulation of agriculture, the report sets out a series of measures that should be adopted by the government.

Proposals include the "naming and shaming" of farmers who are successfully prosecuted for environmental damage, introducing new licences for farming different types of land and encouraging insurance companies to cut premiums for farmers who adopt best practices.

More controversially, the report also calls for on-the-spot fines for less serious pollution offences.

The report warns that majority of prosecutions undertaken by the agency are for serious offences, often leaving those guilty of lesser breaches free from punishment.

"Imposing small 'instant' fines for lesser offences could reduce overall prosecution costs; provide government with a pool of funds for further environmental improvements; increase farmer compliance and help establish and reinforce good farming practice," it says.

But there is also a warning that higher environmental standards could comes at the expense of higher prices.

"If further regulation, standards, monitoring and enforcement are imposed, this may result in increasing costs for government and farmers and higher food prices," says the study. "If British agriculture faces higher standards, then it could be argued that agricultural imports should follow suit."

The Environment Agency said that measures to prevent environmental damage were often cheap and effective and would yield significant benefits for farmers themselves.

The agency also backed the government's move to give greater backing to sustainable farming. Support to move farming practice in the right direction would be money well spent, it said - a view that the NFU said it "totally supports".

The farmers' union added: "It is important that government now recognises that only a profitable agriculture can deliver further improvements. Policy that continues to bankrupt the industry will achieve nothing."

"Even environmentally sensitive farming has a bi-product such as animal waste and farmers and growers are constantly striving to find ways to reduce the impact of food production and the costs associated with it."

The report came as environment secretary, Margaret Beckett, announced a new strategy to put sustainable development at the heart of her department's work.

"Sustainable development is about a better quality of life for everyone, now and for generations to come," she said.

"It is a simple idea, but achieving it means facing up to some major challenges. This strategy marks the start of a process by which we hope to embed the tenets of sustainable development deep within the culture of the department and, by example, within government."

Beckett added: "Importantly, the strategy will set the tone for future policy documents such as the forthcoming Sustainable Food and Farming Strategy."

The NFU said partnership would be important in responding to the challenges ahead.

"Government must work with the industry to ensure that we can build on the improvements made so far, together," it said in a statement.