The decision is a blow to the literary world as the Whitbread is rivalled only by the Booker in terms of prestige and influence.

A spokeswoman for Whitbread said the decision would officially be announced this week.

“We no longer sell products or services that carry the Whitbread brand, so it is no longer appropriate to fund an award to promote the Whitbread name,” she said.

The company now operates through brands such as Beefeater restaurants, Costa Coffee and David Lloyd leisure centres.

Recent winners of the Whitbread have shown how important the prize has been for promoting sales.

The prize for the best book of 2004, announced earlier this year, was Andrea Levy’s Small Island. The award is credited with helping the novel sell more than 600,000 copies in paperback. The 2003 winner, The Curious Incident of the Dog in the Night-time, by Mark Haddon, has sold more than 1m paperback copies.

In the previous year Claire Tomalin’s biography of Samuel Pepys beat the novel Spies, written by Michael Frayn, her husband. “That head-to-head contest gave us world-wide coverage,” said Tomalin.

“Yet neither of us really minded who was going to win. We share all our money anyway.”

In 2001 Philip Pullman won with The Amber Spyglass, which is the only children’s book to have taken the overall top prize.

For the past 20 years of the awards there have been five categories, covering novel, first novel, biography, poetry and children’s book. Each section winner gets £5,000. The overall book of the year, which wins an extra £25,000, is chosen from the category winners.

The book world will be anxious that the awards can continue with a sponsor after the 2005 prize, Whitbread’s last, is made next month.

“It’s such an important event and sponsorship,” said Colin Tweedy, chief executive of Arts & Business, an organisation for bringing business sponsorship to the arts.

Senior figures involved with the prize said future awards were likely to emphasise closer links with children, although the sponsor would have to decide the changes.

“There could be a new competition for child writers or there could be more involvement with the existing National Reading Campaign,” said Bud McLintock, director of the prize-giving committee.

The Whitbread has been criticised in recent years for using “celebrity” judges for the final selection stages.

Jerry Hall, the model, was on the panel that chose Seamus Heaney’s translation of Beowulf in 1999. The athlete Denise Lewis served in 2001 and Joely Richardson, the actress, was on the committee in 2002. More recently, Liza Tarbuck, the television presenter, and Hugh Grant, the actor, have been judges.

Explore UK News

• Crime News

• Education News

• Health News

• Science News

• Scotland News

Times Recommends

• Tree stump 'shows image of Virgin Mary'
• BBC drops Strictly judge for younger model
• Trafalgar Square 'reduced to a spectacle'