The UK computer games development sector is at risk of losing its competitive edge and being overtaken by Korea, Canada and China in 2009.
In a report, Nesta (National Endowment for Science, Technology and the Arts) says the UK games industry is suffering from a severe skills shortage, a funding crisis and a poor record of online games development.
Nesta says the government must step in to help the situation.
The report, Raise the Game, looks at the competitiveness of the UK's games development sector, and the impact that government support in other countries is having on grabbing UK talent, in an industry that will have a projected global turnover of £46bn in 2010.
The report concludes that the UK games development sector will slip to fifth position in the global rankings in 2009 - a further slip from third position in 2007.
The report details a lack of global scale publishers, limited access to finance, and skill shortages as the key factors constraining the UK capacity to generate new games ideas and innovative genres.
Ian Livingstone, creative director at Eidos and "father" of Lara Croft, said, "Despite the creative and technical talent that exists in the UK, in the last six years, half of the independent development studios have closed or have been bought by foreign companies who see greater value in our studios and intellectual property than we do ourselves."
He said, "The UK is becoming a work-for-hire nation and this trend seems certain to continue unless government takes action. Cash tills at games stores might be ringing loudly but not through sales of games developed in the UK."
Nesta wants tax breaks from government to aid games development.