The digital music industry grew by 25 per cent worldwide last year, with sales of $3.7 billion, despite the fact that 95 per cent of all downloads were illegal, according to a report by IFPI, the international record industry body.

The figures came on the day that the Department for Business, Enterprise and Regulatory Reform (BERR) published the responses to its consultation on combating illegal peer-to-peer filesharing, confirming that there was a “marked polarisation” within the industry on how to deal with online piracy.

The government is in favour of a co-regulatory solution in which a change to existing laws would see internet service providers legally obliged to adhere to codes of practice that could see internet users who persistently flout the law disconnected.

The BPI, the voice of the British music industry, claims that the sector lost £180 million to online music piracy in 2008, and needs new legal protection.

In July the BPI signed a memorandum of understanding with ISPs that saw them send out letters to 1,000 subscribers per week who have been engaged in illicit filesharing, over a three month period.

The ISPs are vehemently opposed to any plans that would force them to disconnect their own customers, and claim that the problem can be solved by creating business models that steer internet users away from piracy, or by rights holders initiating legal action themselves.

BT wrote in its submission: “Unauthorised P2P filesharing of copyright material is fundamentally a market issue which needs to be addressed through a range of commercial means.”

But the music industry claims that without legal backing, any agreements to punish internet users who download illegally would founder.

John Kennedy, chairman and chief executive of IFPI, said: “The government needs to understand that ISPs are not going to do this voluntarily because if they do the good players are going to hand business to the bad players.

“If an ISP says they’re never going to disconnect their customers, that’s like a marketing campaign. We can only deal with this with a level playing field which is going to come from regulation.”

The government will set out its response to the consultation in an annexe to the preliminary Digital Britain action plan, due to be unveiled by Lord Carter, the communications minister, on January 26.

Lord Carter said: “We received some opposing views on other issues — including regulation — reflecting the fact that this is a complex and challenging problem. We’re now examining what the best way forward is.”

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive