THAMES Water has withdrawn its application for a drought order in London, but the hosepipe ban remains.

The controversial company made the application to further restrict the water use of its five million customers in June, but it said water levels had now risen thanks to water wise Londoners and increased rainfall.

The Environment Agency welcomed the decision, however it told Thames Water to keep the drought situation under constant review and to reapply if "the rain doesn't come."

Thames Water environment director Richard Aylard said there was still a drought in the capital, but that it wasn't "getting any worse".

"The situation has changed since we applied for a drought order for London on 26 June. We took that decision as a sensible precaution, because there was a possibility that we might need to bring in additional restrictions," he said.

"We said at the time that if we had anything like a normal English summer it was unlikely that we would need these extra restrictions. Since then we have seen close to average rainfall in July and August.

"Just as importantly, the response from our customers has been magnificent. In July, despite the very hot weather, they saved 258 million litres a day a fall in demand of 8% compared to what we would usually expect."

Mr Ayland said London reservoirs were now at 78% of capacity, which was higher than at the same time in two of the last three years.

But he warned the company may have to apply for a drought order early next summer.

"A third successive dry winter would make the situation worse and, depending on the amount of rain we receive, could mean that we need to apply again for a drought order early in 2007," he said.

"This makes it even more important that we all continue to use water wisely and review the situation regularly."

However, the company has come under fire for losing 30% of its water through leaky pipes.

Environment Agency Thames regional director Robert Runcie said Thames Water had made the right decision at the right time.

"The drought isn't over - but the close to average rainfall in July and August and people saving water has left London's water supply in a far better position," he said.

"However, the drought is still serious. Groundwater reserves remain well below normal across much of the Thames Valley following the last two dry winters.

"If we have a dry autumn and winter we could be in a difficult position again next year and Thames Water may need to reapply."

Earlier this week, Thames Water announced plans to axe up to a quarter of its workforce as part of a major cost-cutting drive.

The UK's biggest water firm plans to cut up to 300 jobs each year until 2010.

News of the job cuts comes after the firm failed to hit leakage targets, despite profits rising to more than £340.5million.

In an email to his staff, chief executive Jeremy Pelczer said he would keep compulsory redundancies to a minimum by trying to redeploy employees.

A Thames Water spokesman said the company had made the move to ensure it had the right resources in place to improve front line operations and meet its targets for water leakage.