In one case an adult man is said to have regressed to an eight year old.
The investigation was announced by Michael Forsyth, the Home Office minister, yesterday morning. He said it would examine evidence of risks to volunteers taking part in stage hypnotism and the Hypnotism Act 1952.
It will also scrutinise the Home Office guidelines and consult with interested parties including medical professionals and local authorities.
Mr Forsyth said it was clear that unlicensed performances were taking place but that local councils were not taking any action and suggested it was likely the Act, passed after a woman became traumatised by regression hypnosis, would be updated.
His announcement follows a spate of cases where hypnotism has allegedly caused death, disability and regression.
In September last year Sharron Tabarn, a 24-year-old mother of two, who died after being hypnotised at a show in Leyland. She was ordered to kiss a stranger in the audience before being told she would wake up when10,000 volts was shot through her chair.
Mrs Tabarn, of Clayton Brook, Lancs, was frightened of electricity. She died five hours later, after complaining of dizziness. Although her inquest found that it was an accidental death, the Home Office pathologist said it was hard not to believe there was a link.
In March, Christopher Gates, believed to be in his twenties, was given regressive hypnosis on stage. Afterwards he went into a decline and now behaves like an eight-year-old boy.
Mrs Tabarn's death led her mother, Margaret Harper, 48, to start a campaign to ban stage hypnosis. She says it frequently causes headaches, nausea and fear of sleeping.
Her concern has been taken up by Colin Pickthall, the Labour MP for Lancashire West. In a Commons debate yesterday morning he revealed he had had letters from all over the country giving disturbing accounts of the effects of stage hypnosis.
One Blackpool man's arm was paralysed for a week afterward. Another man attempted suicide and one volunteer became a compulsive eater of onions after being told to eat them instead of apples.
Mr Pickthall said: "This is plainly a highly dangerous business with potentially, perhaps actually, huge consequences for the national health service as well as the people concerned."
He said the guidelines, which lay down that local authorities must licence hypnotism performances, were worthless because they were largely ignored.
The regulations forbid hypnotists to harm the public and ban them from suggesting volunteers behave in an indecent or offensive way. They are not allowed to carry out age regression.
But Mrs Harper claimed she came across hundreds of hypnosis acts taking place without permission, partly because local authorities frequently did not know about the Act.
"All the hypnotists' shows inflict mental pain. Nobody knows what happens when somebody is hypnotised. Unqualified people should not be tapping into the unconscious mind," she said.
Dr Godfrey Briggs, past-president of the British Society of Medical and Dental Hypnosis, said he did not want a complete ban on stage hypnotists but called for them to be registered and properly trained.
The rise of the popularity of stage hypnotism follows the success of Paul McKenna, the former Radio One disc-jockey who became a millionaire by performing on television.
His set-piece suggestions include telling male volunteers they are contestants on Blind Date where the female line-up is indescribably ugly. He hypnotises more than 2,000 people a year in stage shows.