UK banks have launched an appeal in the High Court to challenge a controversial ruling on unauthorised overdraft charges.

A judge ruled in April that the fees banks charged were subject to regulation by the Office of Fair Trading (OFT) under "unfair contract" rules.

Seven banks and a building society will argue that their overdraft charges and conditions are exempt from the provisions of the 1999 Unfair Terms in Consumer Contracts Regulations.

They also say the charges are not unfair because they represent legitimate fees for providing an overdraft facility.

The ruling had opened the way for an OFT investigation into whether the charges are actually unfair, and if so, what a fair charge should be.

Fees for people who go into an unauthorised overdraft or who breach their agreed limit can be as much as £35 for a single bounced payment, although campaigners claim the cost to the banks could be as little as £2.50.

Since the test case consumers have contacted their banks about charges to ask for them to be refunded and as a result millions of pounds of charges have been reclaimed through the courts.

If the ruling is upheld, the judgment could cost banks £2.6 billion a year in lost revenue and cost them £1 billion in customer refunds at a time when they can ill afford it.

Members of the industry have also warned that losing the case is likely to lead to the end of free banking in the UK, with consumers instead having to pay a monthly fee or a fee for every transaction they carry out.

The decision by the banks to appeal the ruling has been criticised by consumer groups, as thousands of bank customers hoping to recover the charges must wait until the outcome of the test case is known before they can apply for a refund.

The banking watchdog the Financial Services Authority has granted a stay on outstanding claims until January 26 next year, and it is expected to continue extending it until the end of the case.

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