Some 635 small and medium-size publishers applied yesterday to the office of fair trading for an inquiry into a demand by Waterstone's which they say will cause wholesale bankruptcies and either raise book prices steeply or "vastly" reduce the public's choice.

The unprecedented complaints, from many of the most active smaller presses in Britain, are in reaction to an ultimatum requiring price discounts of 50% in the books they sell through the country's biggest specialist high street bookseller.

The small presses tabled a formal complaint that Waterstone's has broken the 1998 Competition Act by abusing its dominant position in some sectors of the book trade. If the complaint is upheld, the company could be fined up to 10% of its UK turnover.

The new discounts, a rise of up to 15% for many publishers, are aimed at increasing Waterstone's revenue and cutting its stocks of unsold quality books. An editorial in the Bookseller magazine yesterday forecast the policy would mean a substantial drop in the range of titles available in bookshops.

The company boasted last year that its new flagship store in London's Piccadilly had an "unrivalled" high quality stock of 250,000 titles. But it now claims to have 16m unsold books in shops across the country, with half of its new titles failing to sell a single copy.

Its parent company, HMV Media, faces debts of £500m and has tried unsuccessfully to sell the bookshops.

The discounts are being driven through by Waterstone's new chief executive, David Kneale, previously an executive with the chemist chain Boots. Responding to the complaints, Mr Kneale said: "Why should Waterstone's subsidise small publishers?"

The company has also told publishers it wants 90 instead of 60 days' credit. Unless all these demands are granted, it will stop stocking their books.

In a joint protest letter to the OFT, the publishers said the policy was an attempt to fix prices. "Ultimately the book-buying public will suffer either from a vastly reduced choice of books or from disproportionately increased retail prices.

"Reduced sales would cause the wholesale closure of businesses. Publishers would be unable to cover costs, still less make a profit, at such discounts".

Waterstone's has well under 50% of the overall UK bookselling market. But the publishers claim that its discount policy is vulnerable under the Competition Act because it is dominant in quality books, especially crime and literary fiction, and is the only high street outlet for many of the book-buying public's needs.

The Independent Publishers Guild, representing 350 small presses, said: "Most independent publishers are already working on very lean margins. For these, consenting to Waterstone's demands could cause substantial losses or price rises beyond the tolerance of many book buyers.

"More than one publisher has described the situation as being asked to choose between a fast death and a slow one."

Last night Chris Rushby, Waterstone's head of supply chain, said: "It is a substantial change. But a lot of suppliers have supplied us in terms that caused us to make a loss and some of the suppliers to make a profit.

"They are moving from a fairly comfortable commercial relationship to a less comfortable one. This is not about stock reduction. It is about supply terms.

"A lot of people at Waterstone's would subscribe to the view that books are special. We do not want to put anyone out of business. If a publisher wants to make a counter-proposal, we will listen".

The office of fair trading said: "We will look at the complaints but it cannot necessarily be assumed that an investigation will follow. We have to look at the evidence about what the market is."