Labelling guidance from the Government allows companies to label cheese and butter as UK produced even if the raw milk came from another EU country but was processed in Britain, a report from the Environment, Food and Rural Affairs (Efra) committee warned.
The MPs are calling on the Environment Department (Defra) to strengthen its guidance, as the current system pushes down farmgate prices for UK farmers who have to compete with cheaper milk from abroad which can still be labelled as British.
Only half the butter and cheese eaten in the UK is made from British milk, the report said, warning it was "unacceptable" consumers could not buy British and be confident they were supporting the country's farmers.
The guidance should also be be extended to more products such as yoghurt, ice-cream and ready meals, according to the report looking into ways to help farmers - who have been hit by volatility in the prices they are paid for their produce.
Committee chairman Neil Parish said: " Many people in Britain want to support a British agricultural industry.
"But Defra's current guidance on origin labelling allows for companies to sell products such as cheese and butter as British when the raw product is being sourced oversees.
"As a result, consumers are given a false impression that they are supporting a home industry when in fact their money is not supporting UK farmers at all.
"The British public deserve to buy British in confidence. Defra must strengthen its guidelines around country of origin labelling and continue to press for EU support in establishing clearer and better labelling requirements."
The report also said that while supermarkets could choose to sell milk cheaply as a loss leader, farmers must not be the victims of price wars taking place in the UK, receiving unsustainable low prices for their produce.
More long term contracts are needed to give certainty to producers, farmers should club together to form producer organisations to give themselves more power in the market place, and farmers should seize opportunities for UK and global growth.
There is also a need to "urgently" consider how to extend the Groceries Code Adjudicator's remit to include both direct and indirect suppliers to the major UK retailers, to give greater protection to the supply chain, the MPs urged
A spokesman for Defra said: "The industry-owned voluntary principles on country of origin labelling mean that consumers can have great confidence in where their cheese and butter comes from with the vast majority of products labelling the origin of their milk.
"We are also continuing to push for mandatory labelling for dairy products with the European Commission so consumers can be even clearer when they are buying products made from British milk."