Facebook, the social networking website, has been forced into a dramatic climbdown over a new advertising system after users in America expressed privacy concerns.

More than 55,000 people signed an online petition calling on the site to withdraw the Beacon service, which automatically records online spending habits.

The system exploits the power of "word of mouth" marketing. Online retailers can embed the Beacon code into their websites so that when Facebook users visit sites to buy products or services, details appear in an individual's Facebook news feed, which can then be viewed by all the user's Facebook friends. In return for feeding the data back to Facebook, the other websites get a free advertisement for their services.

Unlike most Facebook applications, for which users "opt in", Beacon was set up to work automatically unless account-holders clicked on a small pop-up box asking them to opt-out of disclosing information.

Many users did not know this and were shocked to see recent purchases appearing on their Facebook profile. It led to accusations that the site was ruining Christmas by publicising details of gifts to their likely recipients. One user, Sean Lane from Boston, told The Washington Post that he had his festivities spoiled when Beacon sent an alert to his wife. It said: "Sean Lane bought 14k white gold 1/5 ct diamond eternity flower ring from Overstock.com." The message even had a web link to the Overstock site which revealed that the ring was sold at half-price. In response, Overstock abandoned the Beacon service.

Following the bad press, Facebook told its 55 million users on Thursday that it was backing down over the scheme. It is giving users "more control" over the Beacon stories published on their news feeds, and they will have to approve Beacon alerts individually before they appear on their profiles. "We recognise that users need to clearly understand Beacon before they have a story published," Facebook said. "We will continue to refine this approach to give users choice."

The outcome will disappoint Facebook's 23-year-old founder, Mark Zuckerberg, and his advertising team. They saw Beacon as a litmus test to gauge ways of making money out of the site. The U-turn is also a victory for the left-wing US civil rights group MoveOn, which led the anti-Beacon protests. Adam Green, a spokesman for MoveOn, welcomed the move to make Beacon an opt-in service but said the site should go further to protect people's privacy. "Before, if you ignored their warning, they assumed they had your permission," he said. "If Facebook were to implement a policy whereby no private purchases on other websites were displayed publicly on Facebook without a user's explicit permission, that would be a step in the right direction."

Facebook members said they were delighted by their successful show of strength. "This is a pretty powerful feeling," wrote Mr Lane. "Honestly I didn't think that people could make changes like this through civil action. I am very proud to be a part of this!"