The UK music industry is failing to get to grips with the internet, according to a new report.

A study by the Institute for Public Policy Research found that emerging artists in particular were losing out financially.

And the use of free music on the internet, often put on sites illegally, could hasten the decline of the music sector.

The report was written by Paul Brindley, the bass player with The Sundays.

He said the internet was a significant new market for music, but there was little return for the bands creating it.

Some artists such as David Bowie have tackled the internet head-on, launching albums on it using secure systems, so copies cannot be made once the music is downloaded.

Others are releasing material on their own personalised MP3 players.

But sites which give an outlet to unsigned bands often mean that the acts are signing away their best music for nothing.

Advertising and revenue

"Clearly there is a problem as to what value unsigned bands' material is worth compared to established acts," said Mr Brindley.

"The music is being used as a lever to other products and most of the revenue from these sites is from advertising. I have only ever come across one site where the revenue is fed back to the artists themselves.

"The bands themselves don't really feel in a position to fight for the best deal and are usually just pleased that they have a window to the world."

Illegal sites are also a growing problem. The British Phonographic Industry is now taking action against 12 sites every week, compared with 12 a month last year.

The report's recommendations include:

• an online "one-stop shop" for all music licensing
• a code of conduct guaranteeing artists a fair deal on the internet
• a cross-industry body with power to shut down illegal sites.

The study comes as convergence is bringing the internet and the traditional music industry closer together.

'Clear strategy'

As well as the merger between AOL and Time Warner, companies such as EMI are investing heavily in the internet.

EMI predicts that within five years, about 10% of its music sales will be online.

"There is a real opportunity for the internet and other new technologies to be used to exploit the creativity and talent of Britain's musicians and music entrepreneurs," concludes Mr Brindley.

"Our proposals set out a clear strategy. It is up to the industry and government to act on these."