Bailey told the Financial Times that the regional newspaper industry faced "immediate peril" as ad revenue continues to plummet amid the economic crisis and rise of the internet.
In recent weeks, the Daily Mail and General Trust reported that ad revenue at its Northcliffe Media subsidiary fell 40% year on year in January.
Trinity Mirror said its regional ad revenue fell 37% year on year across January and February, and Johnston Press said it had suffered a 35% year-on-year drop in ad revenue since the start of the year.
Bailey said that the industry could only survive if regional media groups were allowed to consolidate to obtain sufficient scale, according to the report.
Under current ownership rules, there must be at least three separately owned commercial media providers across TV, radio and newspapers, in addition to the BBC, in a given local area.
Bailey told the FT: "What we urgently need is for the Digital Britain report to acknowledge that the current regime is not fit for purpose."
The Office of Fair Trading has already begun a review of local and regional media ownership rules following Lord Carter's suggestion in the interim Digital Britain report released in January.
A total of 57 local UK newspapers closed during 2008.
Bailey said that nil-premium mergers, rather than takeovers, could preserve the value of existing businesses and keep the local newspaper industry in the UK alive.
MEN Media, owner of the Manchester Evening News, announced last Tuesday that it is to shed 150 jobs, including 78 editorial roles, and close eight offices around the Manchester area.
A day later, sister GMG media company Surrey & Berkshire Media revealing plans to close two weekly papers and cut 95 jobs.
Northcliffe, the regional newspaper arm of the Daily Mail & General Trust, also announced last week that it is to cut 95 jobs as part of a restructure that will see it close a number of free papers in Essex and Kent.
At the same time rival regional publisher Archant, which publishes the Eastern Daily Press, is to cut 54 of its 179 editorial staff as part of a plan to implement an integrated print and online operation. Reports today claim a public outcry has resulted in Archant reducing the number of job cuts from 54 to 34.
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