The simple test which measures the level of sulphite in the urine has shown the chemical is particularly high in those suffering from schizophrenia.
South Thames health authority is now considering patenting the test.
However, mental health charities warned that the discovery raised "ethical dilemmas", particularly if insurance companies insisted on using it while considering life assurance.
One person in a hundred will be diagnosed at some time in his or her life with schizophrenia. There are currently 250,000 people in the United Kingdom suffering from the illness.
Mental health charities estimate that the cost of caring for those with a severe mental illness is about pounds 500m a year.
The Royal College of Psychiatrists' annual conference was told that studies at both Guy's and St Thomas' hospitals in London have discovered that those suffering from schizophrenia have high levels of sulphite in their urine - an abnormal build up of metabolic by-product.
But because the 35 patients who were examined were all on medication, it was originally thought that it could be as a result of the drugs they were taking.
However, Dr Theodore Soutzos, specialist registrar at the Guy's and St Thomas' NHS Trust, said that preliminary research suggests that levels of sulphite are equally high in those people who show symptoms of schizophrenia for the first time - suggesting that high levels of sulphite are nothing to do with the medication.
He had examined patients who had only suffered one episode and who had taken no drugs and the results were the same.
"This is groundbreaking research," he said. "The mere concept of being able to measure something like this is unheard of.
"If we can use this to diagnose schizophrenia earlier then it means it is easier to control and we can give people smaller doses of anti-psychotic drugs, which often have serious side-effects."
Dr Soutzos added: "If you can prevent the patient developing schizophrenia, you can improve the outcome and the patient may make a full recovery."
Mind, the charity which campaigns on mental health issues, warned that the test could be used in ways which would not aid the mentally ill.
"We would be concerned," said a spokeswoman yesterday. "A survey we did found that people with diagnoses such as schizophrenia or manic depression often faced discrimination over life assurance, mortgages, health insurance and car insurance so this test raises ethical dilemmas, if people were to have to take a medical."Reuse content