Internet service providers (ISPs) and the music industry have reached an agreement to clamp down on illegal downloads.

It is thought that around 6.5 million Britons have downloaded music and films illegally over the past year and estimates suggest that the practice will cost the recording industry up to £1 billion over the next five years.

The fightback against online piracy will begin with letters to thousands of the most prolific downloaders to inform them that their activity has been detected and is being monitored.

The Government's departments for business and culture hailed the "world-first solution" agreed by the industry to address unlawful file-sharing.

Britain's six largest ISPs - BT, Virgin Media, Orange, Tiscali, BSkyB and Carphone Warehouse - signed a memorandum of understanding with the British Phonographic Industry (BPI), the body which represents record companies in the UK.

ISPs have agreed to commit themselves to developing legal file-sharing services and to ensure their customers know that it is illegal to share copyright-protected music.

It is thought likely that many parents will learn for the first time from the letters that their children are using their bedroom PCs and laptops for illegal piracy.

Business Secretary John Hutton said: "This is an intelligent approach to tackling unlawful file-sharing by industry and ISPs.

"It tells consumers what they can do, rather than just what they can't.

"This light-touch approach keeps up with the pace set by technology and will protect consumers, creative industries and the use of technology now and in the longer term."

Culture Secretary Andy Burnham said the success of the UK's creative industries depended on a workable copyright system.

"It's a great thing that new technology lets young people today explore popular culture in a way my generation simply could not," he said.

"But this freedom cannot extend to allowing people to think they can access content for free.

"We expect Britain to produce the best bands and films in the world, but that will only happen if we find new ways of rewarding our creative talent and investing in new names.

"This is why today's announcement is so significant. It holds out the hope of a sustainable future for music and our other creative industries whilst ensuring that consumers continue to get the full benefits that new technology can offer."

ISPs and film and music companies are expected to develop a new code of practice together on how they will deal with infringements, and the Government will then look at their proposals and consider how they can be backed up by new laws.

No details are available of what sanctions might be introduced to deal with persistent online pirates. Some of those involved in the issue would like to see ISP customers required to pay annual fees to cover the cost of downloading, or broadband usage limits imposed on heavy downloaders to stop them sharing files.

Feargal Sharkey, the former Undertones singer who is now chief executive of British Music Rights, the body that represents musicians, said the industry wanted to co-operate with downloaders to address the problem of piracy.

"Will we ever 100% stop online piracy? I'm not sure we'd ever achieve that goal," he told BBC Breakfast.

"But it's worth trying to pursue and work with the 70-80% of young people that want to change and are prepared to work with the industry.

"I think it would be right and proper and very sensible and pragmatic for the music industry to work with young people."

Geoff Taylor, chief executive of the BPI, said the memorandum marked an important milestone, with ISPs recognising their responsibility to help deal with online piracy.

"BPI has always believed that a partnership approach is the best way forward, as we showed with our education campaign with Virgin Media, launched in May," he said.

"This has demonstrated that ISPs and the music business can work together positively to raise awareness about illegal filesharing.

"The music business is constantly innovating to offer new, safe and legal ways to enjoy music online, and to create a future for digital music where creativity and copyright are respected.

"This agreement will help to create an environment in which such new digital services models can flourish."

The UK film industry described the announcement as a "commendable example of what can be achieved when Government and industries work together".

It said tackling copyright theft was vital to the continuing growth of the UK audio-visual industry.

UK Film Council chief executive John Woodward said: "The UK film industry employs almost 40,000 people and contributes £3.2 billion to the UK economy, and the single largest threat facing the industry is film theft.

"So today's announcement marks a significant step forward. For the first time the creative industries, ISPs and Government have come together to tackle the growing problem of illegal file-sharing."