Demon Internet, a British Internet service provider (ISP), has agreed to pay damages and costs estimated at more than £200,000 sterling (€332,391) to settle a libel action for material posted on one of its newsgroups. The ground-breaking deal is expected to trigger a significant increase in online censorship and could damage the growth of e-commerce in Britain, experts warned.

Demon, now owned by Thus, was sued by Dr Laurence Godfrey, after it failed to comply with his demand to remove a "squa lid, obscene and defamatory" posting about him from its servers in 1997.

The action highlighted an area of great legal uncertainty. Demon argued that ISPs could not vet the millions of messages posted each day. It said providers should be treated as if they were telephone companies, with no liability for the content they carry, rather than as publishers.

But an interim court ruling last year found against Demon because it had failed to act after it had been put on notice.

ISPs also risk being sued for breach of the right to freedom of speech if they take down offending material.