TAX credits are still causing "distress and hardship" to families in the region, despite Government promises to improve the system, a damning report said yesterday.

The parliamentary ombudsman said the number of complaints about the flagship policy to cut poverty - particularly demands that overpayments be repaid - continued to rise.

Ann Abraham said there had been some improvements since her last report, in 2005, but described the handling of complaints as still not "fit for purpose".

The "extreme worry and anxiety" caused meant some low-income families were vowing to never again apply for tax credits, she warned.

Ms Abraham said: "The impact on those concerned, typically those on the very lowest incomes, who are the most vulnerable in society, is huge and highly distressing.

"As one complainant put it, 'Tax credits are supposed to help families, not cause them money worries'. It is essential, therefore, that these matters are addressed as quickly as possible."

Ms Abraham said a quarter of complaints to her office concerned tax credits, of which 91 per cent were concerned with overpayments.

Most damningly, the ombudsman said the Government's plans to overhaul the overpayments mechanism would not "prevent harsh and unfair decisions in the future".

The report - more unwelcome news for Gordon Brown, who devised the tax credits system - follow the revelation that £90m was overpaid in tax credits across the region last year.

Blunders meant about 114,400 families in the North-East and North Yorkshire were paid too much in working tax credit and child tax credit in 2005-06.

Under current rules, about two-thirds of that £90m will be claimed back - threatening families who may have already spent the money with financial hardship.

Ms Abraham's report, called Tax Credits: Getting it wrong?, made six key recommendations which, she said "require prompt action".

They including better staff training and for Revenue and Customs staff to consider the impact of their demands that money be repaid.

Much of the criticism of tax credits has centred on the way payments are supposed to be adjusted as soon as a claimant's income changes.

The system has been unable to cope, leading to delays which means many people have been paid - and have spent - money they are then required to repay, once the system catches up.

Danny Alexander, the Liberal Democrat work and pensions spokes- man, accused Mr Brown of a "callous disregard for the ombudsman's first report".

He added: "This report is another devastating indictment of the tax credit system, designed by Gordon Brown, which has caused confusion and hardship.

"Claiming tax credits can be highly distressing and the complaints mechanism is clearly still failing. Gordon Brown is incapable of admitting mistakes."