Councils need as much as £10.5 billion to bring Britain's "crumbling roads" back to a good condition, according to a report.

Local authorities in England and Wales filled in more than two million potholes last year - a 29% increase on 2011, showed the report from the Asphalt Industry Alliance (AIA).

This filling in cost £113 million, with £32 million being paid out in compensation claims and staff time spent on claims coming to more than £13 million. The report said the compensation pay-outs were 50% up on the 2011 figure.

Based on responses from 75% of England and Wales councils, the report also showed that repairing roads damaged by extreme rainfall cost these local authorities around £338 million last year.

The AIA said local authorities in England, including those in London, reported a shortfall in their annual budgets totalling £829 million.

Local authorities are responsible for 95% of the country's roads. The AIA said 20% of local roads were reported as being in "poor condition", which is defined as having five years or less life remaining.

AIA chairman Alan Mackenzie said: "Constantly having to patch up crumbling roads rather than using highway engineers' skills properly, to ensure good road condition in a planned and cost-effective way, is nonsensical and costly to the country. When you add up all the costs incurred by not following this advice, it's hard to understand why central Government cannot find a way to invest in this much-needed work and save on higher costs in the future."

Local Transport Minister Norman Baker said: "We are providing councils with more than £3 billion between 2011 and 2015 to maintain their roads and pavements."

He went on: "It is ultimately up to local highway authorities to determine how they prioritise their funding, but we want to help them get the best value for money. That is why we are funding the highways maintenance efficiency programme which helps councils work together to deliver a first-class service to their residents, at the same time as saving money."

Neil Greig, director of policy and research at the Institute of Advanced Motorists, blamed the poor road conditions on tight budgets and severe weather.

"The make-do-and-mend approach to potholes means most patches are simply opening up again and again as the weather veers from snow and ice to rain," he said.

"Last year's pothole review suggested that councils need to put new techniques in place and share resources. But this is clearly not enough without guaranteed long-term funding. Such funding would allow a proper plan to be drawn up that targets those roads in the worst condition."