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Arctic Monkeys in dispute with pioneering radio website over 'failure to pay royalties'

Some of Britain's top bands, including the Arctic Monkeys, Editors and Basement Jaxx, are locked in an increasingly bitter dispute with the music radio website Last.fm over substantial unpaid royalties.

Talks between the pioneering internet company and leading independent record labels aimed at resolving the issue have broken down without agreement, it emerged yesterday.

Merlin, which represents labels including Beggars Group and Koch – who between them account for 12 per cent of global sales – has written to its members claiming Last.fm has been unwilling to "properly address its illegal infringing activity".

The website boasts 21 million users worldwide and offers 3.5m audio tracks. In 2007 CBS bought the business for £140m – at the time the largest Web 2.0 deal brokered for a UK-based company – and agreed to keep the existing management team, after Last.fm became the fastest-growing free music website in the United States. The take-over made the founders among the wealthiest internet pioneers of the decade.

Merlin's chief executive, Charles Caldas, confirmed that he had called in the lawyers but said he was still hopeful of striking a deal covering the explosion in on-demand streaming services. He is urging labels to seek independent legal advice in their dealings with Last.fm.

Mr Caldas said: "We'd do whatever we feel is necessary to ensure that our members' rights are properly protected.

"We're considering what evidence we can put in front of Last.fm to show that there is a vast amount of our members' repertoire being used on their services without licences."

Describing the situation as "not acceptable", Mr Caldas accused the site of failing "to keep the negotiation going at a pace we think is acceptable".

It is the second recent setback for Last.fm. The website wants to become the first site on which any song can be accessed at any time – paid for simply by advertising revenues. Its founders hope that users will also eventually be able to access every music video ever made. But last month Warner Music Group pulled Led Zeppelin songs and hundreds of thousands of other tracks from the service.

Last.fm was one of the stars of Web 2.0, the internet trend that saw the rise of sites including MySpace and Facebook. It was founded in 2002 in a small office in Whitechapel, east London, by four German and Austrian entrepreneurs. It allowed users to customise and share playlists appealing to their tastes.

The following year they integrated the Audioscrobbler system, a plug-in devised by the computer student Richard Jones as part of a project while studying at Southampton University. The huge database calculates recommendations based on the listening habits of music fans.

This week Last.fm launched its own artist royalty programme offering unsigned and independent artists the chance to earn money as their music is played. Some 450,000 tracks have been uploaded since the programme was announced in January.

Announcing the service, one of Last.fm's Austrian co-founders, Martin Stiksel, said: "The young musician making music in a bedroom studio has the same chance as the latest major label signing to build an audience and get rewarded. It is another revolutionary step towards helping musicians take control of their music – and, more importantly, make a living from it."