Britain's high street fashion retailing giant Primark is at the centre of a row over allegations that illegal immigrants who were paid just over half the minimum wage had been employed to make fashionable knitwear for one of the company’s bestselling ranges.

Primark said yesterday that it had launched an inquiry after an investigation by the Observer and the BBC revealed that Manchester-based knitwear manufacturer TNS Knitwear may have breached key employment and immigration laws. Breaches of the legislation could lead to fines for each illegal worker employed and potential prosecution for tax evasion and employment law abuses.

The Observer says that the workers, caught by an undercover journalist on a hidden camera, were allegedly being paid £3 an hour - just over half the minimum wage of £5.73 - for 12-hour days, seven days a week. It also says that many of the garments made by the Pakistanis, Afghans and Indians over the past five months had ended up two miles away in one of Primark’s largest and most profitable stores in Manchester's Market Street.

The allegations were put to Primark this weekend five months after an undercover investigation began into Primark's British supply chain. The investigation focused on Manchester's textile industry and in particular TNS Knitwear, which supplies 20,000 garments to the firm every week and Fashion Waves, a subcontractor used by TNS, was also investigated.

The Observer revealed that employees at both TNS and Fashion Waves were caught on film admitting their illegal status in the UK. One Pakistani working on a Primark order tells how his visa had run out eight years ago, yet he had remained in Britain working under the radar of the authorities. Working conditions inside both TNS and Fashion Waves were also exposed as cramped and cold, in breach of health and safety regulations. Most dramatically, the undercover journalist working at both units captures cash-in-hand payments being made to her for gruelling hours. The money, apparently paid without the knowledge of the taxman, amounts to about £3.50 an hour, £2.20 less than the minimum wage. TNS Knitwear denies the allegations, and there was no comment from Fashion Waves.

A Primark spokesman said: "Primark was informed this week that one of the UK factories from which it buys some knitwear has allegedly broken a number of UK employment, tax and immigration laws.  Primark is conducting its own investigation into this. Once that investigation is complete it will decide how to proceed. Meanwhile, Primark has handed all relevant information passed to the company over to the relevant enforcement agencies so they may take action."

Primark also says that it is extremely concerned about the very serious allegations made against its supplier TNS Knitwear Ltd and against TNS' unauthorised sub-contractor Fashion Waves Ltd. “TNS is one of very many suppliers to the UK high street, supplying Primark and other household names. TNS is a relatively small supplier to Primark. The issue of illegal workers is one which affects many industries throughout the UK and is not exclusive to high street fashion.” A spokesperson for Primark said.

Meanwhile, Primark agreed on Saturday to remove all references to the Ethical Trade Initiative, the trade body that monitors Britain's top retailers, from its 140 storefronts across England, Scotland, Wales and Northern Ireland. Primark, as part of an agreement made with the ETI on Friday, must also remove ethical branding from thousands of tills and its corporate website while investigations continue.