UK ebusiness companies have been warned to protect themselves against potentially crippling legal actions following the end of a landmark libel action against ISP Demon Internet last week.

The industry group e-centre UK, which represents UK ebusiness companies, urged its members to defend themselves against libel actions after Demon decided to pay damages to academic Laurence Godfrey to pre-empt a High Court action.

Godfrey claimed that Demon had hosted "squalid, obscene and defamatory" material about him. The result has rocked the UK ISP community and split it over the issue of whether UK legislation needs changing.

Graham Avory, marketing manager of e-centre, said ISPs and companies hosting ecommerce sites need to make sure their terms and conditions clearly state they are not liable for any defamatory material on their sites.

"The ISP must also reserve the right to withdraw any material that it considers defamatory, even if a court has not yet ruled that it is," he said.

Demon argued that ISPs could not possibly monitor the millions of messages posted daily on their servers. The ISP said the case highlights further questions over whether service providers might still be held responsible for defamatory message posting, even if they have not been warned to remove them.

A Demon spokeswoman said: "It is contrary to commonsense to make ISPs responsible for millions of items on the internet. Legislation has not kept pace with the development of the internet and Demon will lobbying for modernisation of the law."

ISPs said they cannot win either way. Nick Lansman, secretary general of the Internet Service Providers Association, warned that ISPs also risk being sued for breach of the right to freedom of speech if they take down offending material. "ISPs are stuck between a rock and a hard place. It's very serious and distracting the industry from the real issue of growing ebusiness," he said.

Chris Cain technical director of service provider Internet in Nottingham said the decision will force crippling costs on to ISPs and force them to pay for back-end systems to monitor and remove legally sensitive material from their servers.

"Anything that makes UK ebusinesses less competitive places us at a huge disadvantage," he said.