Adults must be paid at least £5.05 an hour, up from £4.85, while 18 to 21 year olds will be paid £4.25.

The recommendations came from the Low Pay Commission which said the number of jobs had continued to grow since the minimum wage was introduced in 1999.

Businesses wanted it frozen, warning more rises could damage competitiveness but the unions want a £6 rate.

Women 'most affected'

A further increase in the adult rate to £5.35 an hour is provisionally scheduled for October 2006.

According to the commission, many businesses had found the last two significant increases in the minimum wage "challenging".

"We have therefore recommended only a slight increase above average earnings, and concentrated it in the second year to allow business more time to absorb the impact," said chairman Adair Turner.

The government says most of those on the minimum wage are women - with many working in cleaning, catering, shops and hairdressing.

For too long, poverty pay capped the aspiration and prosperity of far too many hard-working families Tony Blair At-a-glance: Blair press conference

Unveiling the latest increase, Mr Blair said he wanted the minimum wage to become a "symbol of decency and fairness".

"For too long, poverty pay capped the aspiration and prosperity of far too many hard-working families," he said.

"Too often, people were told to make a choice between the indignity of unemployment or the humiliation of poverty pay."

Chancellor Gordon Brown and Transport Secretary Alistair Darling promoted the news in Edinburgh, Wales Secretary Peter Hain and Welsh First Minister Rhodri Morgan in Cardiff and Northern Ireland Minister John Spellar in Belfast.

The government has not accepted the commission's recommendation that 21-year-olds should be paid at the adult rate, but says it will look again at the rate later on.

Mr Brown said: "We want to do nothing that can damage the employment opportunities for young people, particularly young people entering the labour market for the first time."

The government has said it will look at tougher action against the small number of employers who consistently refuse to pay the minimum wage.

What employers are saying to us is that it's at a level where it's starting to bite into the competitiveness of companies right across the country David Frost British Chambers of Commerce

The national minimum wage is currently set at £4.85 per hour for those aged 22 and above, and at £4.10 for those aged 18 to 21.

A £3 per hour minimum wage was introduced last October for 16 to 17-year-olds, but apprentices are exempt.

The Trade Unions Congress welcomed the increase, but has called for a £6 minimum wage by next year.

But the Confederation of British Industry (CBI) called for a "pause year" to assess the impact of the above inflation rise in the minimum wage in October.

And David Frost, director of the British Chambers of Commerce, said: "The level of increase each year has increased by rates far outstripping the rates of inflation.

"What employers are saying to us now is that it's at a level where it's starting to bite into the competitiveness of companies right across the country."

Low-paid workers

The Liberal Democrats' economics spokesman Vincent Cable said he supported the move to raise the minimum wage. "It's not just good for the workers themselves but it lifts them out of benefits and therefore is good for the Exchequer too," he said.

Conservative leader Michael Howard said he accepted the principle of the minimum wage and would not "seek to disturb" the increase.

Speaking on BBC Radio 4's Woman's Hour, Mr Howard hinted the Tories might go into the general election with a promise to cancel income tax for the lowest-paid workers.

"There are people on very low salaries, very low incomes indeed who really shouldn't be paying income tax," he said.