A consumer watchdog is taking legal action against Google over the way it sells and displays its sponsored links, in a case that could "send shudders down the industry".

The Australian Competition and Consumer Commission (ACCC) said that it believed its action, which named Google Inc and Google subsidiaries in Ireland and Australia as defendants, was “the first to seek legal clarification of Google’s conduct from a trade practices perspective".

The case stems from 2005 when Trading Post, an Australian classified ads magazine, took out sponsored links in the name of two car dealerships from Newcastle, New South Wales. People clicking on the names of the dealerships found themselves on Trading Post’s website.

The ACCC dropped a case against Trading Post when the publication said it would stop using its competitors’ names in Google sponsored links. However, the watchdog now says that Google “engaged in misleading and deceptive conduct” by allowing Trading Post to buy ads in the name of the car dealerships.

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In addition the ACCC is also claiming that the way Google displays its links is misleading.

On Google’s search results page, sponsored links appear in a coloured panel at the top of the page, and in a narrow column on the right-hand side of the page. Both areas include a small heading identifying the results as sponsored.

Companies and organisations can pay to get their results featured in these areas. In the main section of the page, results are determined by Google’s celebrated algorithm, which attempts to calculate the relevance and popularity of a page using a range of criteria including the number of inbound links to each page.

“Google, by failing to adequately distinguish sponsored links from ‘organic’ search results, has engaged and continues to engage in misleading and deceptive conduct,” the Australian Competition and Consumer Commission (ACCC) said in a statement.

Google Australia described the lawsuit as “an attack on all search engines” and said that it would contest it.

Shara Evans, head of the IT consultancy Market Clarity, said the case would have far-reaching implications if the court found that a search engine was responsible for monitoring everything that advertisers paid to put up as sponsored links.

“What would have a real impact is if Google had to take a policing role into the content of the advertisers,” she said. “That, I think, would send real shudders down the industry.”

Google has faced a stream of lawsuits from companies alleging that rivals have bought sponsored links triggered by their trademarked words or phrases. In one continuing case, American Blind & Wallpaper Factory is suing Google because searches for the company brought up sponsored links bought by its competitors.

Google has won similar cases in US federal courts brought by Geico, a car insurance company, and Rescue.com, an IT support company. Last year in France, Google lost a case in which the fashion company accused the company of running links to counterfeit goods alongside legitimate results.