The music industry has threatened to sue internet service providers that allow customers to share files illegally, even though sales of digital music hit $2 billion (£1.01 billion) last year.

Figures published by the International Federation of the Phonographic Industry (IFPI) showed that online and mobile phone music downloads now account for 10 per cent of global sales.

The digital music market almost doubled in 2006, rising from a value of $1.1 billion to $2 billion. Single-track downloads were estimated to total 795 million, up 89 per cent on 2005. Digital is predicted to account for 25 per cent of the total music market by 2010.

However, the rise failed to compensate for an overall decline in sales of CDs, with the total music market expected to record a 2 per cent to 3 per cent fall when figures are published next month.

John Kennedy, IFPI’s chairman, said: “We don’t have the holy grail of digital offsetting the decline of CDs as yet.”

CD sales have slumped 23 per cent since 2000, with 14 per cent of regular web users saying that they still exchanged music files for free.

The industry has taken legal action against 30,000 individual file-sharers and forced the biggest peer-to-peer sites, such as Kazaa and Grokster, to halt their activities.

Now the industry is turning its sights on the web giants such as BT, Yahoo! and AOL, which control millions of customer accounts. The IFPI said that the internet providers had a legal obligation to disconnect customers who were proven to be widespread downloaders of free music files and had refused warnings to desist.

Mr Kennedy said: “If people suddenly find they have no internet connection, we believe this would have a dramatic effect. We are prepared to take legal action against ISPs if they will not step up and play their role.”

Sales of portable music players soared 43 per cent to 120 million in 2006, boosting digital music consumption. Most MP3 players are filled with music transferred from personal CD collections.

However, the major record companies face a challenge from eMusic, the service that deliver downloads in the universally compatible MP3 format. EMusic has sold 100 million downloads and secured 10 per cent of the digital market, second to iTunes. Major record companies will not license tracks to the service because they can be copied between a number of devices.

Mr Kennedy pointed to mobile music sales as a major area for growth this year. Phone downloads already account for 90 per cent of the digital sales in Japan. The UK is the world’s second-largest market for digital sales, with 53million single track downloads sold in 2006 — double the figure for 2005.

Alex Zubillaga, head of Warner’s digital strategy, said: “We have to innovate and find new ways of attracting customers. As an industry we were spoilt by having it too good for too long with the CD and did not respond to technological change.”

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