When farmer Tim Reed sold off his dairy herd in 1992 to set up a holiday business, people said he was mad. Milk prices were high and farming was all he knew. With the money he raised from the sale, he renovated some disused stone buildings on his 200-acre sheep and arable farm in Cornwall and opened six holiday cottages. Eight years on, the dairy market has gone into freefall and the cottages account for 75% of Tredethick Farm's total income.

With hindsight, it was a good decision. Reed has since built three more cottages and added a games room, adventure playground and pets farmyard for children. He enjoys having people around - there can be up to 40 guests a week in August - though he says some forget that he also has a working farm to run.

"I have to remind myself that it can be more profitable to spend half an hour chatting with a guest who will then make a repeat booking than half-hour ploughing the fields," says Reed.

When the Northern Ireland Tourist Board announced its EU-funded Rural Cottages scheme in 1995, offering landowners 80% subsidies to renovate their derelict barns and outbuildings in return for a 21-year lease for holiday use, they were flooded with more than 700 applications. With the average income on a Northern Irish farm barely £5,000 a year, the chance to make some additional revenue was too good to pass up.

Farming incomes have fallen 60% in the past five years. In the same period, rural tourism has become the fastest-growing UK tourism sector, accounting for 12 million holiday trips a year, £11.5bn in tourist spending and supporting more than 350,000 jobs. More rural and farm-based attractions have opened in the past 10 years than any other type of attraction.

Much of the growth has been encouraged by government funding. Rural diversification is one of the cornerstones of the Ministry of Agriculture, Food and Fisheries' (MAFF) rescue package for farmers. It has made funds of £150m available as part of its Rural Enterprise Scheme and tourism projects are high on the agenda.

There is no doubt that tourism, managed wisely, can bring valuable extra revenue to the countryside and help ensure the continuation of rural lifelines, such as the village shop, local transport and farmers' markets. But concern is growing that Government handouts are distorting the market and encouraging farmers to swap one high-risk, low-income business for another.

The Southwest is one of the pockets of the UK that was designated as an area for financial assistance. There are now more than 4,000 farm-related tourism businesses in Cornwall and Devon alone and, according to Reed, it's reached saturation point. "What is the point of the Government encouraging farmers to go into an industry where supply is growing faster than demand? It's madness," he says.

Reed is one of a group of local farmers who have taken matters into their own hands and formed the Cartwheel consortium - with MAFF funding - to support and promote farm attractions in the West Country. "It's ironic that we had to get MAFF funding to solve a problem that was caused by their policy in the first place," he says.

The English Tourism Council and the Countryside Agency have published a consultation document to raise awareness of these issues and canvas opinion before the government launches its Rural White Paper outlining its plans for the countryside. Many local authorities are still counting the cost of EU-funded "white elephants" - big tourism projects built a decade ago in the name of urban regeneration that nobody wants to go to. The English Tourism Council wants to make sure the same mistakes are not made with the countryside.

Elaine Noble, acting chief executive of the ETC and a farmer's daughter says bed and breakfast is not the solution to the ills of the countryside. The aim of the document is to encourage an integrated approach to planning and marketing. "There's no point in farmers turning their barns into accommodation if it's not in an area that tourists want to visit. You also have to look at accessibility: is there a good pub and restaurant nearby, a village shop or market where people can buy local produce, are there local transport services and well-maintained footpaths and places to walk?"

Depending on the results of the research, the outcome could be a set of guidelines on the development of rural tourism, training schemes for farmers, business advice or marketing support to help them move into this new arena, and a stronger case to put to the Government about how rural enterprise should be funded and managed.

Tourism does have a role to play but if it is not managed properly the results could be disastrous both for farmers and the countryside. "Tourism offers a great opportunity for the countryside but it is not a panacea," says Noble. "There needs to be a balance. If all the farmers are running B&Bs, who's going to mend the dry stone walls that the tourists come to see? People want to see hedgerows and lambs in the fields. We won't have a green and pleasant land unless the farmers are farming."