The ultimatum will be made at a "water summit" convened in London to help ward off another summer of water shortages caused by low rainfall.
Among measures ministers want the companies to take, and the regulator Ofwat to encourage, are free leakage repair services for domestic consumers. These would cut wastage quickly by tackling leaks which are more accessible than underground pipes.
The summit, called by the Deputy Prime Minister, John Prescott, will also discuss forcing companies to cut leakage from their pipes by setting mandatory targets. Those due to attend include the water companies, their regulators, environmentalists and consumer representatives.
Michael Meacher, the environment minister, told the Independent on Sunday: "We are arguably in a worse position that at the beginning of the drought in 1995. We have to plan for a worst-case scenario.
"The water companies have not started well. I am worried that the public is not going to co-operate with them when they ask for proper care in water usage. There is much the industry can do both in terms of leakage and in ensuring that their money goes in investment rather than pay-offs for fat cats."
The environment minister said he he would like to see a free leakage repair service, offered by some companies, "extended widely", and that usage figures will be monitored closely.
Mr Meacher said the Government was "determined to get the leakage rates down" and would examine the powers of the environment agency and the industry regulator Ofwat to see if they were strong enough to "ensure that our objectives are achieved". If not ministers would examine the need for new laws.
He added: "We want the powers which exist used fully. If they are insufficient we will consider taking more powers".
The Water Services Association, which represents nine of 10 privatised companies, said its members' efforts to cut leakage were already saving 150 million gallons a day that were being wasted two years ago. It promises only to consider building new reservoirs "at a last, and not as a first, resort".Reuse content