The government has refused to clamp down on inflation-busting fare increases, as Britain's biggest train franchise prepares to raise the cost of off-peak travel by 20%.

Rail minister Tom Harris said fare regulation would not be extended to prevent a repeat of the controversial fare rise by South West Trains, which takes effect on Monday. "There is nothing that I can or indeed want to do on fares that are unregulated," he said.

He added that imposing more price caps to stamp out SWT-style increases would result in the government investing more than the £4.6bn a year it already puts into the railways: "Regulating more fares will just increase the subsidy."

The comments were criticised by the commuter watchdog Passenger Focus, which said SWT had broken a gentleman's agreement.

"There must be a concern about the levels at which unregulated fares can potentially rise," said Anthony Smith, chief executive of Passenger Focus. "In the past we have had a tacit understanding that rises would be at a certain level, but South West Trains has blown that out of the water. The government cannot stick its head in the sand about this."

Mr Harris, speaking at the Rail 2007 conference in Birmingham, said he was not going to defend SWT's price regime but companies should be allowed to set unregulated ticket prices as they saw fit: "I am not going to get involved in saying whether it's the right thing to do. We are not going to extend regulation to include fares that are set at a commercial level."

Under the price-cap regime, around four out of 10 ticket sales are regulated, led by season tickets and saver fares, which cannot be increased by more than the rate of inflation plus 1%. However, train operators are allowed to charge as much as they like for other tickets.

SWT's 20% price increase on some off-peak fares has drawn strong criticism from Passenger Focus and trade unions, who have threatened to report train operators to the Office of Fair Trading if they announce similar changes. According to Passenger Focus, SWT has imposed the biggest increases on routes where it faces no competition from other operators, leading to accusations that the company is abusing a dominant market position.

Mr Harris told the Guardian that the government is close to unveiling an overhaul of fare schemes after talks between the Department for Transport, Passenger Focus and train operators: "My concern is for regulated fares. We are hoping to make an announcement very soon on a much more simplified fare structure." It is understood that the new structure will include changes to saver fares, with some off-peak saver tickets going up in price.

Passenger groups are concerned that the franchise system, where the government invites bids from companies to run services on certain routes, is encouraging fare hikes. SWT, which is owned by the Scottish transport group Stagecoach, is paying the government more than £1bn over its 10-year franchise.

Train operators are also demanding greater government investment in the rail network. Speaking at Rail 2007, the Association of Train Operating companies said a further £3bn must be invested in the network between 2014 and 2019 in order to ease projected congestion problems.