In a stinging attack, a Commons select committee said it was "unacceptable" that the higher education sector receives £15 billion of public funding, but are unable to answer "straightforward" questions about the worth of degrees at different universities.
The damning report which looked at students' university experiences said: "There needs to be a change of culture at the top in higher education.
"At several points we encountered what could be characterised as defensive complacency.
"We found no appetite whatsoever to investigate important questions such as the reasons for the steady increase in the proportion of first class and upper second class honours degrees over the past 15 years or the variation in study time by students taking the same subjects at different universities."
The cross-party group of MPs found that the proportion of graduates awarded a first class degree rose from 7.7% in 1996/97 to 13.3% in 2007/08.
And they concluded that it appears that "different levels of effort" are required in different universities in order to obtain similar degrees.
This "may suggest that different standards may be being applied," the report said.
The MPs said they were "uneasy" that some universities say that the fact that international students want to study at British universities is evidence that standards are being maintained.
"We conclude that it is simplistic and unsatisfactory for higher education institutions to be seen to rely on the fact that international students continue to apply as evidence that standards are being maintained," the report said.
"It is absurd and disreputable to justify academic standards with a market mechanism."
The report says that the current system for protecting standards is out of date and inconsistent.
It calls for the Quality Assurance Agency, a universities watchdog, to be re-established as Quality and Standards Agency, with responsibility for monitoring and reporting on standards.
Under this change, universities would have their accreditation to award degrees reviewed every 10 years.
The wide-ranging report also says the current fee and support system discriminates against part-time and mature students, and the upcoming fee review must address this.
It adds that the current bursary system for poor students is unfair, as students from the same backgrounds receive different financial packages depending on the university they attend.
A national bursary system based on need should be established instead, it says.
Phil Willis MP, chairman of the innovation, universities and skills committee, said: "To remain competitive in the 21st century the complacency we detected must be addressed.
"We are extremely concerned that inconsistency in standards is rife and there is a reluctance to address this issue. The QAA needs radical transformation if we as a country are going to meet the needs of a 21st century higher education system with two million students."
But Universities UK (UUK), which represents vice-chancellors, said it was "disappointed" with the report.
UUK chief executive Diana Warwick said: "While there are some useful recommendations in this report, we are disappointed that so much of the work that universities are doing to improve the student experience has been ignored, and that the picture being painted of the higher education sector in many areas is so negative."
Dr Wendy Piatt, director general of the Russell Group of top universities, said: "We are rather dismayed and surprised by this outburst when vice-chancellors have engaged in hours of discussion with MPs over these issues."
Professor Paul Wellings, chair of the 1994 Group of universities, said: "We support flexible and diverse higher education provision which allows the sector to meet the wide range of differing needs of students, government, businesses and communities.
"However, we must ensure that throughout this diverse range of provision the very highest quality of academic experience is maintained."
Business Secretary Lord Mandelson said: "I don't recognise the committee's description of our higher education sector, which is in fact world class and second only to the USA as a top destination for overseas students.
"We are also seeing record applications from our own students, who value the benefits of a UK degree."
Shadow universities minister David Willetts said: "Higher education is improving rapidly across the world and this report is a wake-up call for the sector as well as for ministers.
"Our universities are excellent, but there is a risk that we will be overtaken by other countries if we refuse to face the big challenges on standards, the student experience, funding and widening access."
Liberal Democrat universities spokesman Stephen Williams said: "There is clearly a concern that parts of the higher education sector are not facing up to some of the serious issues which risk undermining our universities' world class status.
"Universities often raise the issue of grade inflation in GCSEs and A-Levels so they should not be afraid of examining degree classification to ensure that standards are high."
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