The government rejected proposed legislation on Friday aimed at combating metal theft, which costs the UK economy upwards of 770 million pounds a year, but said it still saw the need for legal changes to combat the crime.

Graham Jones, an opposition Labour member of parliament, had drafted legislation banning scrap yards from making cash payments for metal and requiring them to take proof of identification and an address from any potential seller.

It passed through the House of Commons in November, receiving parliamentary support at the time.

Without government support, however, Jones's proposals stood little chance of becoming law and on Friday were rejected in parliament after ministers declared their objection at a second reading.

We have a split in the government between Home Office ministers who want action and ideologues in BIS (the Department for Business, Innovation and Skills) who think that stopping the theft of war memorials is somehow 'damaging red tape', said Jones.

We will now not likely see legislation before the Olympics, possibly not until 2013.

Metals theft in the UK doubled last year as thieves took advantage of high metals prices, according to the Energy Networks Association (ENA), which represents telecoms provider BT and Network Rail and was in support of the bill.

A government spokesman said it supports the aims of the bill, believing legislation is needed for a sustainable, long-term solution to the growing menace of metal theft, adding it had stepped up law enforcement.

We are currently looking at a range of options including what would be the quickest and most effective legislative vehicle for the changes that are needed, the spokesman added.

The move to reject the bill was welcomed by the British Metal Recycling Association, an industry body that process over 95 percent of Britain's scrap and opposed the bill's proposed cash-less system.

If you banned cash today, all the regulated business would obviously obey the law, but people who are selling scrap, they'd sell it to illegal yards, said Ian Hetherington, director general of the BMRA.

We'd rather see a good law even if takes a little more time.

Around 13 million tonnes of metal are recycled in the UK every year, while around 15,000 tonnes of metal are stolen annually, according to the BMRA.

Prices of metals such as copper shed 21 percent of their value last year, but their resale value remained lofty enough to lead to about 700 incidents of metal theft per month against energy networks, according to ENA.

Scrap yards contacted by Reuters in December said they pay about 3.50 pounds ($5.50) for a kilo of copper, depending on quality and the market price on the day.

We're operating with 1964 legislation here, which allows a whole range of illegal activity. One scrap yard settled an account of a quarter of a million pounds in cash, in (supermarket plastic) bags, said Tony Glover, ENA head of press and public affairs.

Police do not have enough power to close (scrap yards) down. At the moment if you don't comply with the scrap metals dealers act, you are subject to an average fine of about 350 pounds.

About 1.5 billion pounds of Britain's 5 billion pound-a-year scrap metal industry is cash-based, making it ideal for making money quickly without leaving a paper trail.

Police are ramping up efforts to tackle metal theft. The Metropolitan Police has launched a Waste and Metal Theft Taskforce, and police across England and Wales took part in a national day of action in December.

In England's North East, which police say is the epicentre of railway metal theft, police started trials of a system this year in which scrap sellers must prove their identity so that stolen metal can be traced.

(Reporting By Maytaal Angel, editing by Jane Baird)