The music industry took a firm swipe at internet service providers (ISPs) today, accusing them of being in large part responsible for the dramatic loss in profits record labels have suffered as a result of illegal downloading.

In a strongly worded statement, the IFPI - the music industry body - called for the EU to draw up legislation that would place obligations on ISPs to monitor the traffic across their networks, and to suspend the accounts of customers who broke the law.

In its annual report, the IFPI said that revenue from digital downloads had risen by 40 per cent to $2.9 billion in the past year, but that this had not been enough to offset the "sharp decline" in CD sales which had resulted from "systemic piracy" on the internet.

"Copyright theft has been allowed to run rampant on their networks under the guise of technological development," John Kennedy, the IFPI's chief executive and chairman, said. "ISPs have largely stood by, allowing a massive devaluation of copyrighted music."

"This in turn has prompted a crisis that has wide implications for the whole digital marketplace. The moment for EU legislation to be drawn up has arrived."

Mr Kennedy's ultimatum was delivered as IFPI reported that revenues from digital music now accounted for 15 per cent of overall sales, but that the growth of digital sales had dropped from nearly 100 per cent between 2005 and 2006, to 40 per cent last year.

The IFPI estimated that 1.7 billion tracks were downloaded in the past year, but that for every song accessed legally, 20 were downloaded illegally using so-called 'peer-to-peer' networks. In Brazil - where 1.8 billion tracks were illegally shared - music sales had slumped by 50 per cent in the first half of 2007, while in Mexico, they fell by 25 per cent, according to research by IPSOS.

ISPs have long argued that they should not be responsible for the illegal file-sharing that takes place on their networks because they could have no way of monitoring the entirety of their traffic and are "mere conduits" of information.

They say that the content being accessed illegally is hosted on servers elsewhere - which they are powerless to close down, and that in any case data protection legislation prevents them from looking at individual packets of information being sent.

"ISPs are no more able to inspect and filter every single packet passing across their network than the Post Office is able to open every envelope," a spokesman said.

The IFPI report found that the US was still the largest market for downloads, where digital music accounts for 30 per cent of all sales, followed by Japan and the UK. In the UK 77.6 million tracks were bought online last year, up 47 per cent on 2006.

The report was also sceptical of the so-called 'advertising supported' model for digital music, where listeners are able to stream songs from a site 'for free' in return for watching or listening to ads. On Wednesday, Last.fm, the social music site, announced it had done a deal with all the major labels which will mean people can hear tracks up to 3 times, in their entirety, while being exposed to ads.

"Questions remain as to the potential for these models as some believe the addition of ads on free services will [send] consumers elsewhere, and there are continuing concerns about copyright infringement," it said.

Among the other findings of the IFPI report were:

- the top downloaded single in 2007 was Girlfriend, by Avril Lavigne, which sold 7.3 million copies

- sales of music directly to mobile phones grew by 100 per cent to account for 12 per cent of all sales. In Japan, sales of music to mobile accounted for 90 per cent of all digital music revenues

- there are now more than 6 million tracks licensed to be accessed through digital services, up from 1 million in 2003

- in South Korea, long a bellwether country when it comes to the uptake of new technologies, 60 per cent of the music bought is downloaded

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