Mentally ill people living in the community who fail to take prescribed medication could be forcibly detained and taken to hospital for prolonged treatment.

The bill, the biggest reform to mental health policy since the second world war, marks a partial shift away from the now discredited care in the community programme.

The NHS plan claimed to make improvements in mental health one of its top priorities. The government had promised legislation as long ago as 1999, amidclaims that it was determined to reform and improve a neglected part of the NHS.

In July 1999 a consultation paper was published and pilot projects to develop services for people suffering from severe personality disorders were started.

In December 2000 a white paper to reform the Mental Health Act again promised an indeterminate sentence, but the overhaul was not part of the Queen's speech after Labour won the election.

Despite a £300m boost in funding, the sector is largely underfunded.

Recent figures show suicides increasing by 1%, or 200 a year, despite the target of a 20% reduction.

Some of the moves were challenged yesterday by Lord Bragg, the Labour peer who is president of the mental health charity Mind.

He called for an overhaul of special hospitals, saying: "If people are not dangerous, they should be brought back into the community. We cannot just lock them up and forget about them."

Lord Bragg said that, at its simplest, mental illness needed to be seen like a physical disability.

"The whole benefits system must be open to people with mental disabilities as it is to other people, so they have some support while they beat their illness."

He added: "If you have a mental illness you should be looked after by the state and the company you work for, like everyone else."

The draft legislation comes as the Conservative health spokesman, Liam Fox, prepares to shift strategy towards a more liberal approach.

The move is part of the Conservative party's drive to show that it is committed to helping the vulnerable in society. Dr Fox is likely to claim that the government is not meeting its targets and that hospital beds are running at hugely over-capacity.

There has been persistent criticism that funds marked for mental health tend to be sidetracked into higher profile areas.