The problem mostly involves all inclusive resorts as claimants can say they did not eat elsewhere while on holiday.
Tens of thousands of UK holidaymakers have made claims in the past year despite reported sickness levels in resorts remaining stable.
Travel trade organisation Abta has launched a campaign urging the Government to close a "legal loophole" which it says is encouraging lawyers to sign up people to insist they were ill even if they were not.
Since spring 2016 Travel firm Tui has recorded around 15 times more illness claims than in previous years.
The payouts can be worth around £3,000 to £5,000 - which is more than the cost of many of the holidays involved.
In some cases where tour operators make a payout, they can attempt to claw the money back from the hotels themselves.
But Tui's UK managing director, Nick Longman, said there has been "friction" between the two sides, with hoteliers initially believing "we weren't doing enough" to stop the scam.
"There's a distinct risk that if this carries on as it is unabated, the hoteliers will say to us either 'We don't want to work with the British market at all' or 'We're not going to offer you all-inclusive'.
"I think that would be a terrible thing for the British customer. It's just going to reduce the choice in terms of destinations and the type of holiday," he said.
Tour operators say the sickness issue is ruining the reputation of UK tourists abroad.
Mr Longman described the situation as "totally embarrassing", adding: "A hotel will have customers from four or five markets of Tui and it will only be the British Tui customers who are complaining.
"All you can do is apologise and say 'We're sorry'.
Abta chief executive Mark Tanzer said the fraud is "one of the biggest issues that has hit the travel industry for many years".
The organisation's Stop Sickness Scams campaign said the Government needs to address the problem urgently.
"The Government must urgently address this issue," Mr Tanzer said. "The legal loophole that is allowing firms to unduly profit from these claims must be closed.
"This would allow people with genuine claims access to justice but make this area less attractive to claims firms."
He also warned that holidaymakers pursuing fake or exaggerated claims "risk ending up in jail either in the UK or abroad".