The much-heralded video release of Cathy Come Home , the BBC's ground-breaking 1966 TV drama about homelessness, has been cancelled.

The decision to pull the film at the last minute follows a row that has split the writer, Jeremy Sandford, and the director, Ken Loach, and has upset the family of the late Carol White, the actress who played the single mother at the centre of the story.

Cathy Come Home provoked a period of moral panic in Britain, and is acknowledged as the first campaigning television drama. But Sandford now feels betrayed and mistreated by both Loach and the BBC.

'The astonishing deal they were proposing was derisory. It would have meant that virtually nothing came either to me or to Carol's children, the boys who made a whole nation weep in the film when they were snatched from her arms at the end,' he told The Observer .

The video was to have been released earlier this month and publicity material for the launch has already been sent out. But the project was put hold last Thursday, after Sandford wrote to the production company at the centre of the dispute.'I feel a strong sense of betrayal by my fellow workers,' his letter said. 'This, I believe, is the unacceptable face of capitalism - film-making where the philosophy is that the feelings of one's colleagues are not worth a toffee-wrapping.'

The BBC had offered the video rights to an independent distributor, Red Pictures, in an agreement struck with Loach. If it had gone ahead, Sandford, with Cathy Come Home's producer Tony Garnett and White's two sons, would all have received the minimum few pence from each subsequent sale of the £12.99 video.

Garnett accepted the deal because he was a BBC employee when he made the film. But Sandford, who now campaigns for improved rights for travellers, was unhappy that he would receive at most 7p for every sale.

'With a book publisher the figure would have been more like £1.50 per sale for a hardback or about £1.20 for paperback,' he said. 'I have never been treated so carelessly, and it seems sad when we are talking about such an idealistic and useful film.'

Sandford described the handling of the affair as 'a value system gone berserk'. He claimed that Red Pictures was to pay the singer Cher a four-figure sum for a 30 second burst of music used on the original soundtrack.

'I have seldom felt treated with such disrespect. It is interesting what happens to people when they go out to Los Angeles,' he said, referring to Loach, the director of Raining Stones and My Name is Joe , who is working on his first Hollywood project. 'It seems that the good ones, like Carol, die.'

White died in Miami in 1991 after financial and health problems brought on by drink and drugs abuse.

Earlier this month, more than 30 years after Cathy Come Home was made, the drama appeared near the top of rival lists ranking the best pieces of television broadcasting, produced by this newspaper and the Radio Times. The film has become synonymous with the birth of Shelter, the homelessness charity which was launched in the same year and used Cathy's fictional story to highlight its concerns.

A Shelter spokesman said the programme had been an enormous help to it over the years, although it had never directly received any financial benefit from its coincidental association with the film.

White's sister Jane said: 'This whole issue really needs addressing. When it comes to Carol's children, Steve and Sean, there is no one else that Carol would have wanted to profit from Cathy Come Home. Everyone made money out of Carol in life and everybody that she knew used her, but there is no reason for that to go on.

'My sister is always written about as if she was this horrendous, idiot woman, and she was not like that in real life at all. Sometimes I get very distressed about this confusion with the character she played. It would have been nice to see her treated with respect for once."

Both Jane White and Sandford would rather the BBC had initially brought out the video under its own name, rather than assigning the rights to Red Pictures. This might have led to a better royalties deal, and it would have been more appropriate because Cathy Come Home is such a social landmark.

'Why didn't the BBC want to bring it out themselves in the first place?' asked Jane White, a primary school teacher who lives in south London. 'After all, it was such an amazing piece of work.'

Sandford has written asking Greg Dyke, the corporation's Director General designate, to reconsider the assignation of the rights.

The writer said: 'My view is that if the BBC wishes to continue to attract some of the best writers in the land, as it has in the past, there would be a strong argument for them to be seen to stand by writers and publish them on video itself, or, at the very least, negotiate a reasonable deal for them if the BBC assigns the rights to publish elsewhere.'

A BBC spokeswoman said there had been protracted negotiations about the video release. 'We are certainly hoping that there is still a way to bring it out.' She did not know immediately why the rights had been assigned to Red Pictures.