Information Minister Wu Jichuan said that foreign investment was not allowed by law and that China now planned to clean up the "irregularities."

He added:

"China still needs to strengthen its management over the information content business. So whether or not it is an ICP or and ISP, it is about value-added services. In China, that area is not open."

China has one of the fastest growing Internet markets in the world, with the number of subscribers increasing from 2.1m to 5m this year alone.

Some analysts predict that within 20 years the number of Chinese surfing the net could exceed the number of American users.

Up to now, ambiguity about the role of content providers, like portals, has led to big foreign investments in Chinese sites, even though ISP (Internet Service Providers) who provide Internet access have been banned.

Investors unsettled

Among the biggest Chinese portals are China.com, which floated on the US stock market for $1.4bn, and Sohu.com, which is backed by Dow Jones and Intel.

One Western executive said that if the ban went through, "we would pull out of our joint venture and move equipment, the brand name and foreign staff overseas."

Many Chinese ICPs (Internet Content Providers) are already based overseas, feeding the Chinese domestic market from abroad.

But others said that China would never go through with its threat.

"I wouldn't worry about the possibility of a complete ban because its so vital for China's Internet industry to develop," said Charles Zhang, chief executive of Sohu.com.

"We'll be contacting the Ministry of Information (for clarification)" said Wang Zhidong, president of Sina.com, which also receives substantial foreign investment.

Bureaucractic battle in Beijing

Some observers suggested that the Ministry had raised the issue as part of an internal battle over who will regulate the Internet, which is loosely monitored by a number of security agencies and Ministries.

China has long been worried about the ease in which foreign ideas and movements can be transmitted via the Internet, weakening the Communist Party's control.

The spread of the Falun Gong sect, which led to mass arrests by the Chinese security services, was facilitated by the use of the Internet.

The Information Ministry has also been involved in a fierce battle with reformers to avoid opening up the telecommunications sector to foreign investment as the price of China's admission to the World Trade Organisation.