More should be done to limit problem gambling, including toughening up oversight of the £11bn industry, the National Audit Office (NAO) has said.
The body, which scrutinises public spending on behalf of parliament, called for better protection for "at risk" gamblers.
It said the government should look at the way the regulator, the Gambling Commission, is funded.
The Commission said it agreed that more needed to be done.
The NAO report said that licensed gambling - excluding the National Lottery - had increased by 57% over the past decade.
Much of this rise, it said, was due to an increase in licensed online gambling, which rose sharply in November 2014 when a change in regulations meant all online gambling needed to be licensed, including firms based overseas.
"The Gambling Commission is a small regulator in a huge and fast-evolving industry. While the Commission has made improvements, gambling regulation lags behind the industry," said Gareth Davies, the head of the NAO.
The Commission estimates 1.8 million people are "at risk" gamblers and 395,000 are "problem" gamblers, including 55,000 children. Gambling addiction can lead to mental health problems and severe financial difficulties.
A spokesperson for the Gambling Commission said: "We agree with the report's assessment that we face the significant challenge of regulating a dynamic and developing industry".
It was already discussing proposals to reform its funding model with the Department for Culture, Media and Sport, it added.
The Commission received £19m of funding in 2018-19, almost all of which came from the licence fees charged to operators, the NAO's report said.
The organisation does not have the power to increase the licence fees it charges, making it difficult to invest in new skills to respond to developments in the industry, the watchdog said.
The fees are set through secondary legislation by the government every four years.
Clarification 30th June 2020: This article was amended to reflect the NAO's finding that the 57% increase in licensed gambling was mostly due to a significant increase in licensed online gambling following changes to licensing regulations in November 2014.