Schools having difficulty recruiting teachers should be able to pay staff at London rates - wherever they are, says the School Teachers' Review Body.
The Government supports regionalised pay to create a labour market more sensitive to local needs. But teaching unions have always opposed it and the STRB's plans, published this week, are being criticised as divisive.
It proposes the creation of four pay bands based on existing rates for teachers in inner London, outer London, areas on the fringe of London and those in the rest of England and Wales.
The bands would no longer be confined to specific areas and schools with persistent recruitment and retention problems would be able to apply to their local education authority to move to a higher one.
They would have to provide evidence of problems and demonstrate they had tried to tackle them with other strategies. Joint applications could be made by a number of neighbouring schools.
The review body suggests schools would have 18 months to shift bands.
Further movement would be prevented for an unspecified number of years, to prevent pay inflation and schools trying to leapfrog each other, and to allow the system to stabilise.
Andrew Oswald, professor of economics at Warwick university and an advocate of localised pay, said the change did not go nearly far enough. Far more than four pay bands were needed to address differential living costs across England and Wales. London teachers should be paid 40 per cent more than colleagues in areas such as Cornwall or Tyne and Wear, not the current 17 per cent, because this was the size of pay differentials in the private sector.
John Howson, a leading recruitment expert and an adviser to the Liberal Democrats, and Peter Downes, an authority on school funding, both said the plan would be unworkable without extra Government money.
A Department for Education and Skills spokesman said funding was a matter for "future discussion".
Unions, employers, the Government and other interested parties must submit their views by September. The changes could be phased in from September 2006.
Charles Clarke, Education Secretary, has said the plan will need to be considered alongside the recommendations from Adrian Smith's report on maths, which suggested difficulties in recruiting maths teachers in specific schools and areas could be tackled by increasing their salaries on completion of professional development courses.
Mo Laycock, head of Firth Park community arts college, Sheffield, said:
"This could be interesting. Recruitment and retention is an issue for inner-city schools across the country, not just south of the Watford gap.
But I would want to know more because it could be divisive."
Doug McAvoy, National Union of Teachers' general secretary, said: "Regional and local pay will encourage schools to poach from each other."