The electrical goods industry was warned by Sir Bryan Carsberg, Director General of Fair Trading, to clean up its act with a voluntary code of conduct or face being regulated.
One report, published by the Office of Fair Trading, said some extended warranties cost six times the goods' repair price, that profit margins have soared and that shoppers are being denied adequate information.
A simultaneously published survey by the Consumers' Association said shoppers are paying more heavily for peace of mind than they need and demanded the introduction of a five-point code of practice.
Extended warranties are contracts that cover the cost of repairs beyond the one year normally provided by a manufacturers' or importers' guarantee. They usually last four years and five million - worth £400m - are sold in Britain annually.
The OFT report was particularly scathing about the lack of information given to shoppers, and it condemned profit margins made by retailers, in some cases as high as 70 per cent.
Comparing the cost of warranties to the average expense of repairs, the OFT found one contract for a fridge/freezer was £90 but work usually cost £15. One video camera warranty cost £199, repairs were £40.
Price variations in warranties are enormous. The OFT's investigators discovered repair contracts for a £630 television varied from being free at John Lewis to £150 at Dixons and Currys. For a £470 washing machine and dryer, they ranged from £109.50 at John Lewis to £220 at Comet warehouses.
The report called for retailers to display prices clearly, provide leaflets and increase competition. The OFT backed the Consumers' Association's proposed code of conduct.
Sir Bryan warned: "I am not at the moment ruling out the possibility that I am going to take further regulatory action. But I would much prefer to see this solved by voluntary action."
Kingfisher, the group that owns Comet, said: "Our aim is to balance the cost with peace of mind for the customer and service level. Like any other product we do make a profit."
Dixons said: "Dixons Group practice already reflects most of the OFT's recommendations."