The government has rejected a plea to dramatically increase payments to haemophiliacs given contaminated blood in the 1970s and 1980s.

Public health minister Anne Milton said increasing payments in line with the recommendation of an independent report into the scandal would cost £3bn and was unaffordable in the current climate.

But campaigners said they were "encouraged" by a new review which could lead to higher payments for some of those affected.

The tainted blood scandal saw a total of 4,670 haemophiliacs in the UK unwittingly given blood contaminated with hepatitis C. Of those, 1,200 were also infected with HIV. The blood came from US sources, including drug users and prison inmates. Around 1,200 people affected are still alive and last year the privately-funded Lord Archer review recommended increasing compensation payments in line with those made in Ireland, which are more generous.

Speaking after the episode was debated for the first time on the floor of the House of Commons today Milton said she did "not consider there is a case" for implementing the recommendation.

"I recognise this will be disappointing to those living with the consequences of this tragic episode," she added.

Her statement was a response to a judicial review into the previous government's decision not to implement the Archer recommendations.

It followed a heated debate in the Commons, triggered by the new backbench business committee, after Labour MP Geoffrey Robinson tabled a motion calling on the government to implement the report in full.

Robinson said victims of the scandal were being condemned to a "slow and lingering death". Ministers had "missed a golden opportunity to put the past behind us", he said, calling for an apology akin to David Cameron's statement to the Commons after the Bloody Sunday Inquiry.

Milton said she wanted to offer "sympathy and deep regret at the events, and say how sorry I am for what happened".

Conservative MP Philip Lee, who is a doctor, queried the government's claim that full compensation would cost £3bn, which he said was based on a "typo".

The latest review, which will be completed by Christmas, will consider more of Archer's recommendations, including looking at payments given to people with hepatitis C. They do not receive regular payments under the current system.

Support payments for spouses and families, and access to insurance, nursing and care services, will also be addressed.

Joseph Peaty, who was diagnosed with HIV after being among those given contaminated transfusions, said the review could lead to higher payments for people with hepatitis C.

The 44-year-old said he was "disappointed, but not surprised" that the full compensation demand had been rejected.

"The most positive thing is that they will be looking at this before Christmas," he added.