Bad publicity and lower lending levels are being blamed for a decline in the number of people choosing to take out payment protection insurance.

Premium income from PPI fell by nearly 4% during 2006 to £5.4bn, according to a report published by market analyst Datamonitor.

The product, which is also referred to as creditor insurance, covers debt repayments if people are unable to work due to an accident or illness or if they lose their job.

The group said sales have been affected by recent negative publicity, including claims that the insurance is overpriced and is being mis-sold to people who will never actually be able to claim on it.

Datamonitor said such reports have discouraged consumers from even considering buying the cover. It added that if this opinion of the product becomes more widespread, any future growth in the market will be tempered.

Regulatory bodies, including City watchdog the Financial Services Authority and competition watchdog the Office of Fair Trading, have also investigated the sector and produced reports highlighting poor sales practices in the market.

They discovered that sales controls in some organisations were lax, and that some consumers were not actually being told the true cost of a policy.

The FSA said these problems have now been rectified, and new sales practices have been introduced. However, these have brought additional short-term problems as PPI sales teams adapt to the new procedures which have been put in place.

Datamonitor also said that lower lending levels are affecting sales of PPI, as the cover tends to be sold alongside loans and mortgages, with premiums calculated as a percentage of the repayments.

It said that while sales of the insurance in conjunction with mortgages have increased slightly, this has failed to offset the fall for other products, particularly loans.

The group said it still expects the growth of the market to continue over the next four years, with premium income reaching £6bn by 2011.

Andrew Haslip, the author of the report, said: "The UK creditor market is currently enduring the perfect storm of poorer penetration rates, weaker underlying credit markets, regulatory scrutiny and negative publicity, however this should abate in the coming years."

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