A controversial web monitoring system has come under European Union scrutiny.

Viviane Reding, EU commissioner for information society and media, has written to the UK Government asking it to clarify if it believes that the Phorm Webwise system complies with current data protection legislation.

The Phorm system tracks users' web habits and puts them into categories so that advertising can be targeted more effectively.

However, it has caused a storm of controversy since it was announced earlier this year that three major internet service providers, BT, Virgin and Talktalk, were interested in using the technology. Although Phorm insists its technology enhances privacy, a lot of people are unconvinced.

Dr Richard Clayton, a privacy expert at Cambridge University who has analysed the software, believes that Webwise “performs illegal interception” as defined by the Regulation of Investigatory Powers Act (RIPA).

To make matters worse, BT ran two trials of earlier versions of Phorm’s technology, one in 2006 and one in 2007, without obtaining customers’ consent. The Information Commissioner's Office has examined the technology and agreed to further trails planned by BT as long as users are given the option of opting out.

However, the earlier BT trials have led to calls from protesters to prosecute the telecoms company. Last month a protest was held outside the company’s headquarters when it held its annual general meeting. Campaign leader Alex Hanff handed over a dossier of evidence to the City of London Police, who are now investigating the matter.

In a statement given to us, Phorm said: “We are aware of a letter from the EC to the UK Government regarding the Government’s implementation of EU Directives on data privacy. Any such letter is a matter between the Commission and the EU member state.

"However, we are in active dialogue with the European Commission and the UK Government. We will continue to work with legislators and regulators to ensure that our legally compliant system is deployed in a way that exceeds current internet advertising industry standards for privacy online.

"It is important to note that with our technology, participation will always be a transparent choice. Users will be able to switch it off or on at any time. "

The Government is believed to have until the end of the month to come up with its answers.