Recycled paper is now fetching at most pounds 5 per ton and sometimes nothing, FoE said, meaning that some local authorities have had to abandon collection schemes as they cannot recover their costs.
A survey of 219 councils carried out by the group last month showed that more than one in 10 had ceased a kerbside collection of waste paper, more than one in 10 had closed paper banks, and one in three had abandoned plans to expand paper recycling.
This, FoE points out, is despite the Government's intention in its draft waste strategy, published two weeks ago, to increase recycling "substantially". The group is calling for the Government to intervene in the market, and in particular for it to set a much higher mandatory target for the use of recycled paper in the newspaper industry.
Since 1991 the Newspaper Publishers' Association, which represents the big national dailies, has had a voluntary target of 40 per cent of newsprint to be made up of recycled paper by the year 2000; this has been exceeded: newspapers currently use about 43 per cent. The Newspaper Publishers' Association hopes to agree a new target for the recycled content of newsprint with the Government this year.
FoE wants the present target to be doubled to 80 per cent, and with two other groups, Waste Watch and the Community Recycling Network, is supporting a Private Members' Bill which will be introduced in the House of Commons on 3 July by David Chaytor, Labour MP for Bury North, in an attempt to bring this about.
"Dumping waste paper instead of recycling leaves us with more and more polluting rubbish tips," said Mike Childs, Friends of the Earth's waste campaigner. "The Government's commitment to increase recycling is in early trouble, with schemes around the country collapsing. The Government has the power to take action and they must do."
But it is not that simple, according to David Symmers of the Independent Waste Paper Processors' Association.
The price of waste paper has dropped, Mr Symmers said, partly because the price of Indonesian wood pulp has fallen steeply with the fall in the Indonesian currency and the price of waste paper is linked to the world price of pulp.
"But it's also one of the clearest links you can see between supply and demand," he said. "If all the local authorities in Britain run round and collect it, it will just oversupply the market. There's nowhere for it to go and the price will drop.
"Collecting waste paper isn't recycling. Recycling is when it's been made into a product which has a use. And at the moment there is more waste paper than there is a use for."
Britain uses 4.3 million tons of waste annually in a production of 6.2 million tons of paper, Mr Symmers said - "a high proportion in European terms" - and expanding that was difficult, partly because there were very few paper mills in Britain, he explained.