The Council of State's ruling was made after it was asked to give an opinion on the legality of the scheme by a government investigation committee assigned to look into alleged misappropriation of public funds by the deposed Thaksin administration. The ruling does not affect the regular six-digit government lottery, which will continue to be offered to the public.

Thaksin and his Thai Rak Thai Party were suspected of diverting part of the huge proceeds of the Government Lottery Office (GLO) to fund wasteful populist policies designed to win favour with the rural masses.

By doling out cash and overgenerous entitlements, Thaksin made himself and his party very popular among poor voters, who continue to regard him as their hero despite allegations of large-scale corruption, blatant human rights violations and subversion of democratic rule.

The Act clearly states that 60 per cent of the GLO's revenue must go towards the prizes, 12 per cent to operating costs and agent incentives and the rest to the state coffers. But under Thaksin's government, income from the two- and three-digit lotteries - authorised by a Cabinet resolution in 2003 in order to counter underground lotteries - was not divided according to the law.

Legal action will now be taken against all those involved in authorising and implementing the two- and three-digit lotteries as well as those found to have illegally siphoned off the proceeds.

At the same time, the Surayud government is finalising a bill that seeks to amend the existing Government Lottery Office Act.

The sticky question being debated by policy-makers is whether to rewrite the law to make the two- and three-digit lotteries legal or scrap the scheme altogether.

But doing away with this type of lottery may not be a viable option. It must be pointed out that one of the reasons, perhaps a valid one, cited by the Thaksin government for the introduction of the two- and three-digit lottery is that it would take business away from underground lottery operators.

The GLO's proceeds from the sale of the regular six-digit lottery tickets is about Bt44 billion per year. But it took in about Bt74 billion per year from the sale of two- and three-digit lotteries, which are much more popular because of the perception of easy wins and a low minimum ticket price of Bt20.

If the government decided to stop offering these types of lotteries, people would take their business back to underground lottery operators, whose illegal activities the Surayud administration wants to curb.

It is estimated that underground lottery operators raked in between Bt400 billion and Bt500 billion a year from their two- and three-digit lotteries before the introduction of similar products by the GLO. Some social workers citing their studies said the GLO's competition put only a small dent in the underground lottery business, which continues to grow despite - or rather because of - economic slowdown.

According to one estimate, about 24 million people, or about 51 per cent of Thais aged 15 and above, regularly buy all types of lotteries. It is virtually impossible for the government to crack down entirely on underground lottery operators because they have enough money to pay the police to turn a blind eye and because they employ hundreds of thousands of brokers in an extensive network that cuts across economic and social strata.

The main concern for the Surayud government is to find the right policy mix that balances the need to reduce harm to the public from the corrupting effects of the underground lottery and the need to give lottery buyers a choice of legal options to indulge their penchant for gambling.