A raid on a counterfeit card factory in Birmingham led to the discovery of technology aimed at stealing customer bank details from inside retail chip and pin machines.
A warning was issued yesterday by the Dedicated Cheque and Plastic Crime Unit (DCPCU) - made up of officers from Scotland Yard and the City of London Police - following the raid in Edgbaston on Monday.
Stolen chip and pin terminals, card account numbers, card readers, computer software and counterfeit magnetic stripe cards were recovered.
Two men were arrested.
According to the unit, police believe thieves are hiding devices inside check-out card readers to unscramble codes and reveal customer pin numbers.
They then clone new cards, which will not work in UK cash machines, to withdraw money abroad.
The technology could be used to infiltrate retail chip and pin units and make new cards for use in countries that don't use chip and pin devices.
Card fraud abroad has increased by 77 per cent in the past year, and costs pounds 207.6 million, the specialist police force for card fraud in the UK, the DCPCU said.
A total of 30 checkouts in the UK had been affected by the new type of fraud, the unit said, with petrol stations named as an easy target for fraudsters.
Detective Inspector John Folan, head of the DCPCU, said the arrests were a "significant development".
"We are sending a very clear warning to fraudsters that these crimes will not be tolerated, and that we will continue to target them and disrupt their fraudulent activity," he said.
"These arrests are a significant development in our fight against the organised criminal gangs responsible for this type of fraud."
Commenting on the raid, a spokeswoman for the UK payments association Apacs, said that although the raid was in Birmingham, it did not mean the fraud only happened in the city - it was just where the two arrested individuals had been discovered.
Explaining how the fraud worked, Apacs spokeswoman Sandra Quinn, added: "Whereas fraudsters used to put pinhole cameras above the chip and pin device to get hold of the pin number, they now manipulate the chip and pin terminal to get that basic data.
"They are getting hold of the pin from inside the reader," she explained.
"They steal readers from retailers, cracking them open, and try to recreate one and then put it back in a shop.
"We have been aware that this has been going on because police have been getting reports that terminals are being stolen.
"We're not saying that this was the only gang in the country, but the good news is that on this occasion we were successful in stopping it."
"Fighting fraud is a shared responsibility and we continue to work with law enforcement and the retailers to tackle the organised criminal gangs responsible.
"Chip and pin remains the safest method of payment for goods and services and, in the unlikely event a cardholder is the innocent victim of this or any type of fraud, they enjoy excellent protection under the banking code."
Jane Milne, of the British Retail Consortium, said: "Customers should be assured that UK retailers always take the protection of cardholder data seriously and are continuing to invest millions of pounds to enhance existing security measures."
Two men have been charged with conspiracy to defraud following the police operation.