A controversial service which tracks users' behaviour as they browse the internet in order to increase the effectiveness of online advertising does not present a threat to privacy, the Information Commissioner has said.

Phorm, which is backed by three of the UK's biggest internet service providers, is designed to make online advertising more relevant by taking account of all the websites a person visits, rather than just the content of a single web page.

The Information Commissioner's Office (ICO) said today that the service did not infringe the privacy of ISP customers, because although it tracks an individual's use of the internet, it does not collect information which would allow that person to be identified.

The system, which has the backing of BT, Virgin and Talk Talk, will also give users the opportunity to opt out of individual tracking, meaning that it does not breach the principles of the Data Protection Act, the ICO said.

Phorm's technology is designed to make online advertising more relevant to the people who see it by monitoring the entirety of a person's 'browsing session', rather than simply delivering adverts relevant to the content of a single page, as other advertising platforms do.

For instance, if a person visited five golfing websites before visiting a financial services page, the system might suggest serving another golf advert on the financial page, where typically an advert for a financial product might have appeared.

The service has been criticised for gathering information without a user's consent, however, and last month the FIPR, an influential group of academics, said that the service breached the Regulation of Investigatory Powers Act, which prevents unlawful interceptions of communications.

In a statement, the ICO said: "Users [of Phorm] will be presented with an unavoidable statement about the product, and asked to exercise a choice about whether or not to be involved on that basis. In addition, they will be able to easily access information on how to change their mind at any point and free to opt into or out of the scheme at any point thereafter."

The ICO added that there would not be any "detriment" to users who agreed to have their internet use monitored by Phorm as their information would only be used "to match them against an advertising category and then present them with targeted advertising while browsing the internet.

"The ISP does not create lasting records of browsing habits in this context and do not seek to link living individuals to that information as it profiled and sent to Phorm," the ICO said.

ISPs hope that Phorm's technology will enable them to increase their share of the burgeoning online advertising market, which is dominated by companies such as Google that broker deals directly between advertisers and websites.

Advertisers are also said to be enthusiastic, because it will give them the chance to tailor their marketing more closely, by taking into account a person's internet use over a longer period. For instance, a Paris hotel could say it only wants its adverts to be shown to a person who has visited LastMinute.com or Expedia, two travel sites, at least once, and who has searched for the terms 'hotel paris' in a search engine.

Kent Ertugul, the chief executive of Phorm, told Times Online: "The ICO report confirms what we've been saying all along, which is that there is no issue with our service around data protection. We don't store a history of where people have been or what they've searched for.

"The only purpose [of the number our system assigns to a person's machine] is to distinguish them from someone else, not to find out who they are."

The ICO, which has been reviewing the service for several weeks, would not comment on whether Phorm's technology breached the Regulation of Investigatory Powers Act, saying that was a matter for the Home Office.

A Home Office report last month suggested, however, that the service was legal, concluding that "targeted online advertising services" that were undertaken "with the highest regard for the privacy of ISPs' users" were legitimate as long as an ISP first requested the user's consent.

The ICO's report was also significant because it suggested that a computer's IP address - the number given to any device connected to the internet - does not necessarily constitute 'personal information' for the purposes of privacy law.

The European Commission concluded this week that IP addresses were 'personal information' for legal purposes, but internet companies such as Google have argued that whether IP addresses constituted 'personal data' depends on the use to which they are put.

Phorm, which is based in London, said it would begin a trial of its service with BT customers soon, and would move towards "full deployment" with other ISPs over the next few months.

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