The government says smart prescription drug labels -- bearing tiny hidden transmitters -- should lead the way in fighting counterfeit drugs (search).

But Mark McClellan, the Food and Drug Administration (search) commissioner, said Wednesday the government will not order pharmaceutical companies to adopt the technology or other measures to combat what he described as a small but growing problem.

Instead, McClellan said, he expects the industry to come up with its own plan for putting in place technology that can track drugs from manufacture to consumers' medicine cabinets. Widespread use of radio frequency identification (search), or RFID, is expected by 2007, said an FDA report on counterfeit drugs that McClellan and Health and Human Services Secretary Tommy Thompson released Wednesday.

"By 2007 ... Americans should expect to know with confidence exactly where their drug was made and where it's been," McClellan said.

He called RFID technology one aspect of a comprehensive approach "that uses 21st century solutions to combat criminal efforts to inject counterfeit drugs into our drug supply."

To that end, he said, the FDA will continue to hold off on rules that would require a paper trail to validate every sale between drug makers and distributors. Critics say bringing back that "paper pedigree" would be a good interim solution, but McClellan said the paper trail rules would be costly and still leave gaps in the system.

FDA officials provided a demonstration of how an electronic pedigree might work, using a database that would record each stop made by a shipment of drugs from manufacturer to wholesaler to pharmacy to consumer. Such a system also would make recalls easier, they said.

For now, questions remain about the system's cost and whether it could compromise the quality of drugs.

The report also said companies could cut down on counterfeiting by shipping in smaller "unit of use" sizes -- say, 30 pills in a blister pack instead of hundreds per shipment that smaller distributors then rebottle. The FDA will encourage its adoption, the report said.

Anti-tampering technology (searchalone will not solve the problem, the report said. Other recommendations include:

--Increasing penalties for counterfeiters.

--Drawing up a national list of drugs likely to be counterfeited.

--Enhancing international cooperation.

Fewer than 1 percent of drugstore sales involve counterfeit drugs, McClellan said. But the FDA has investigated about 20 counterfeit cases a year since 2000, compared with five a year in the 1990s.

One of the biggest cases came last year, when more than 150,000 bottles of the cholesterol medicine Lipitor were recalled. Consumers complaining of a bitter taste alerted the FDA that knockoffs from overseas were mixed into the real version.

McClellan also stressed that anti-tamper technology would have no effect on the debate about importing cheaper prescription drugs from Canada, although McClellan and Thompson have aggressively defended the ban on importing drugs by citing safety concerns.

"This is a system that's really designed for the U.S. legal drug supply," he said.

FDA is to report to Congress next year on what it would take to ensure the safe importation of drugs.