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Home secretary David Blunkett has pledged to come up with a new package for asylum seekers by the end of the month.

He fended off calls at the Labour Party conference last week for the immediate scrapping of the voucher scheme, saying his review of asylum policy had been delayed by the terrorist attacks in the US.

Transport and General Workers leader Bill Morris told delegates that the voucher scheme was "demeaning". He said:"The system must go and it must go quickly," adding that the UK's treatment of those seeking asylum was an indictment of society.

Blunkett responded: "We hear what's being said and we understand it well." He promised he would make an announcement on the issue to the House of Commons by the end of this month with the aim of creating a "robust and listening system".

He said the high court case over the Oakington reception centre, in which lawyers acting for four asylum seekers are pressing for millions of pounds of compensation, had caused anger and resentment "verging on racism" among the public.

"We have to carry people with us. People are not racist in their hearts but we need to win them over. So let's get the system right and let's take away the stigma for asylum seekers."

He won a standing ovation when he said that in future, asylum seekers would not be held in prisons unless they were suspected of committing a crime.

The party's national executive committee was hoping for an announcement at the conference but accepted the reasons given for the delay. It has asked the home secretary to reconsider both the voucher scheme and the dispersal system and fully consult local authorities and other organisations over any planned changes.