Laundered diesel is costing the public purse as much as 150 million euro every year, retailers have said.
They demanded tax reforms and more resources for gardai and customs officials to fight the illegal trade.
Frank Gleeson, chairman of representative group Retail Ireland, told the government rising fuel prices is encouraging even more laundering.
"A very conservative estimate would suggest that diesel laundering costs the Exchequer 150 million euro annually and is becoming more of a problem due to the increasing price of legitimate diesel," he said.
"Recent import figures would suggest that at least 12% of all diesel sold in Ireland is illegal."
Mr Gleeson, who is also retail director of Topaz filling stations, said the underworld trade in washing dyes out of agricultural fuel to sell it on for road use was also costing jobs.
He called on the Government to match duty rates for motor fuel with agricultural fuel, introduce a tax reclaim system for farmers and bring in traceability measures. Fines for selling illegal diesel also need to be increased, he said.
Mr Gleeson said giving the gardai and customs more resources to tackle the trade would be self-financing, would reduce state borrowing and put criminals out of business.
"There is a misconception that the majority of laundered fuel is only available in border counties," he said.
"However, illegal fuel has been discovered in Galway, Roscommon, Westmeath, Offaly and Dublin. This suggests that the illegal fuel market is spreading in Ireland."