The group has been making annual payments of £2.8 million to the Thalidomide Trust after the drug, developed by a company owned by Guinness — which later became part of Diageo — caused widespread birth defects.

In the year to June Diageo made an additional payment of £4.4 million to the trust and, after conducting negotiations with the trust, concluded that the payment was insufficient to meet the costs of future care.

The company now expects to raise the annual payment to £6.5 million per year. A final agreement that will cover payments to 2037 should be in place by the end of the calendar year. Diageo also outlined plans to accelerate the rate at which it increases wholesale drinks prices, in an attempt to bolster margins.

The maker of Smirnoff and Johnnie Walker said that over the coming year it would start to announce higher price increases to complement a cost-saving programme that is expected to cut costs by £50 million in the year to June 2006.

News of the move came as Diageo sounded a cautious note on current trading. In an update ahead of its full-year results, it said that the trading environment in Europe had worsened and that growth in sales of its ready-mixed drinks, such as Smirnoff Ice, had slowed in the United States.

It also said that the performance of its beer brands, which include Red Stripe and Kilkenny, had slowed. Wine brands continued to perform well in American and British markets.

Diageo said that second-half sales for the six months to June looked set to be lower than in the first half of the year, when the group reported a 1 per cent fall. Operating profits, excluding recent acquisitions, are expected to be in line with the guidance of 6 per cent growth given at the half-year.

Paul Walsh, the group’s chief executive, said that the cost- cutting programme would incur restructuring costs of £70 million in the coming year.

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