The watchdog will carry out on-site inspections of 50 major payday lenders, which provide short-term, high interest loans to people seeking a bridge to their next wage packet.

The industry has benefited from the economic crisis and subsequent tightening of lending among high street banks but has attracted widespread criticism, accused of taking advantage of desperate people with APRs sometimes reaching 3000%.

The OFT will investigate concerns that loans are being approved without proper checks that the borrowers can afford them. It is also worried that particular groups of people are being targeted and that loans are being rolled over, escalating charges. In addition, it will look at whether borrowers who get into financial difficulties are treated fairly.

A sweep of over 50 payday lending Web sites has already been carried out and the OFT has written to the main trade bodies outlining areas where it considers advertising standards need to be improved.

It will now test to see if the firms meet compliance with the Consumer Credit Act and the guidance on irresponsible lending, and says that evidence gained will be used to boost standards across the sector and to drive out companies that are not fit to hold consumer credit licences.

David Fisher, director, consumer credit, OFT, says: "We are concerned that some payday lenders are taking advantage of people in financial difficulty, in breach of the Consumer Credit Act and not meeting the standards set out in our guidance on irresponsible lending. This is unacceptable. We will work with the trade bodies to drive up standards but will also not hesitate to take enforcement action, including revoking firms' licences to operate where necessary."