Universal Music has signed a rights deal with a new music store that promises the first legal free file-sharing service but whose launch was overshadowed by claims that it did not have industry support.

The New York-based Qtrax flew in stars including LL Cool J and James Blunt to support it at a £500,000 launch in Cannes in January, celebrating its promise to offer 25 million tracks free to download and share. Record companies, it said, would be compensated through advertising revenue on the site and royalty payments would be linked to track downloads.

The company was forced to backtrack after record companies said that they had not signed up. The site was suspended. Negotiations continued with Qtrax, however, along with other companies promising a new download model in an industry in which CD sales have slid a further 10 per cent this year and record companies are keen to pursue alternatives to the dominant iTunes store.

Universal Music, the world’s biggest record company with a catalogue including U2, Amy Winehouse and Gwen Stefani, said it had reached an agreement to allow free, legal downloads through Qtrax. It declined to release details of the agreement but it is believed to have secured a higher royalty rate per download than that offered by Apple’s iTunes store. Qtrax also promised to include purchasing options on its store, although the majority of music will be available free.

The Times understands that the Universal deal will initially cover North America only. Qtrax files will contain digital rights management technology, which restricts the number of occasion that they can be copied.

Qtrax also confirmed deals with Universal Music Publishing as well as EMI Music Publishing and Sony/ATV, the joint venture between Sony and trusts formed by Michael Jackson. The Beggars Group of independent labels will make its catalogue available.

Sony BMG and Warner Music have yet to reach an agreement with Qtrax, which has given no firm date for the relaunch of its site. The company has also yet to announce whether Qtrax music files can be transferred to iPod players.

Sony BMG became the first leading group to license its catalogue using an advertising-supported music model after signing an agreement with the music operator We7. An initial Sony BMG catalogue of about 250,000 tracks is available to stream for free on the We7 website, with a targeted advertisement of five to fifteen seconds playing before each track. Consumers will also be able to buy tracks by clicking through to digital retail partners.

Last month MySpace formed a partnership with Universal, Warner Music and Sony BMG for a “jukebox” service built around online advertising. Consumers would be permitted to stream songs for free.

MySpace, which has 30 million users, will sell digital downloads that play on a variety of music devices, as well as concert tickets, merchandise and ring tones and other content for mobile phones. MySpace Music plans to sell downloads that can play across devices, including the iPod. The social networking site, which is owned by News Corporation, parent company of The Times, has had to settle a lawsuit filed by Universal Music that accused it of copyright theft for allowing users to post its artists’ songs and videos on their home pages without permission.

The willingness of record companies to explore the “free” route reflects a realisation that unauthorised filesharing cannot be defeated through legal avenues and that customers believe that paying for music is optional.

Sales of complete albums are increasing gradually through Apple’s iTunes Store but not sufficiently to make up their slump in physical sales.

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