Scientists have cloned a group of genetically engineered pigs with organs that are likely to be compatible for human transplant operations.

Five cloned pigs, born as a litter on Christmas Day, have each had a gene inactivated, which should reduce the risk of their organs being rejected by the human immune system.

This sort of "knock-out" gene technology is well established in laboratory animals such as mice, but this is the first time that it has been announced in pigs.

PPL Therapeutics, which is next door to the Roslin Institute near Edinburgh, used the cloning technique that the institute's scientists used to create Dolly the sheep. The female piglets were born at PPL's American research division in Virginia.

The announcement, which boosted the company's share prices, comes just days before a similar announcement is expected by one of PPL's closest rivals in America, whose own knock-out piglets were born three months ago.

Both groups are attempting to produce genetically identical pigs that do not possess the gene for 1,3 galactosyl transferase, a natural enzyme responsible for adding sugars to the surface of pig cells, which triggers tissue rejection.

Alan Colman, the research director of PPL, said the development was an important stage in the company's strategy for producing animal organs and tissues for human operations – called xenotransplantation. "The promise of xenotransplantation is now a reality, with the potential to revolutionise the transplant industry," he said.

One of the first targets is to produce pig pancreatic tissue that can be transplanted into human diabetic patients, who lack insulin because of defective cells in the pancreas.

David Ayares, vice-president of research at PPL's American division, said the birth of the piglets was a "critical milestone" in the xenograft programme. "This advance provides a near-term solution for overcoming the shortage of human organs for transplants as well as insulin-producing cells to cure diabetes," he said.

PPL said experiments would have to be done on monkeys before the first trials in humans. These could take place within four years, it said. However, a huge hurdle yet to be crossed is convincing safety authorities that pig tissue will not infect patients with pig viruses. An investigation by British scientists into the risks of xenotransplantation has warned that a virus called pig endogenous retrovirus can infect human cells in the laboratory and poses a real threat to the health of transplant patients and their relatives.

Further research is also necessary before pig organs are viewed as being totally compatible. PPL and other companies working in the field are experimenting with adding genes to pigs to "humanise" their tissue further. If the techniques work, and safety fears are addressed, the potential financial rewards are huge. Analysts predict the global "market" in solid organs is worth about $5bn (£3.5bn) and $6bn for "soft" tissue transplants.

Dr Andrew George, reader in Molecular Immunology at Imperial College, London, said: "Xenotransplantation has a lot of possibilities for the treatment of patients with end stage organ failure. There are not enough organs out there for everybody who needs them.

"Obviously we would like to have a limitless organ supply and if pigs are bred for organs, we could effectively have a continual supply. Even if xenotransplantation never works, many of the technologies used could be applied to the treatment of other diseases."