The draft directive, a copy of which has been obtained by the Independent on Sunday, aims to update European Union legislation to prevent copyright pirates swiping millions of pounds from entertainment company profits in the digital age.
Opposition to the current draft proposal is so strong the European Commission seems unlikely to meet its own deadline to approve and make the proposal public by 26 November.
"There are very conflicting interests here between those who want to enhance copyright protection and those who don't," said a spokeswoman for Mario Monti, the EU's Single Market Commissioner in charge of the proposal.
Telephone companies and Internet access firms such as Netscape fear the Commission draft would make them legally liable for pirated music and published material that slips through their networks unseen.
But the draft has also disappointed the music industry, which is leading the charge for much tougher intellectual property rules, because it only covers the Internet and not cable and satellite transmission technologies.
In addition, electronics equipment manufacturers are up in arms because they believe the Commission proposal would hinder technological advances since new computers or decoders would have to be compatible with anti- pirate devices.
The Commission proposes legislation which then has to be approved by EU governments.
"If this proposal goes through it could mean the end of the Internet as an open network," said Neil Gibbs, external relations manager at the telecoms operators' Brussels lobby, ETNO.
"This proposal would favour evolution back to closed networks, such as how Compuserve used to be, where the operator has control over the content," added Gibbs.
The telecoms companies fear the draft text does not exclude them from being sued for copyright infringement because they are an easier target than private individuals who copy illegally from the Internet.
The music industry, which already loses an estimated $5bn in sales every year through piracy, believes the draft proposal does not offer adequate protection. "We don't think they go far enough in a number of key areas," said Nick Garnett, chief executive of the International Federation of the Phonographic Industry.
The main gripe of the music industry is that although the draft proposal gives the producer and performer control over on-line recording rights, it does not cover other new means of transmission such as cable and satellite.
In Japan, for example, where satellite radio is more advanced, disc jockeys announce the time they will play a full, unedited version of an album enabling consumers to make a digital recording without interruption.
"When you transmit digital signals it is possible to make a clone. The new on-demand services mean if someone has a digital recording device I can get a perfect copy," said Rick Dobbis, president of Polygram Continental Europe, in charge of both cinema and music. He said unless satellite and cable were included in the proposal, entertainment companies would have no guarantees of returns on their investment.
The music industry is also disappointed that the directive did not abolish the private copying exception in the draft directive. The Commission wanted to give some leeway to libraries to make copies for teaching materials. Although in Britain it is illegal to copy a compact disc onto a cassette, the industry and the law tend to turn a blind eye because the quality of the copy is inferior to the original product.
"With the onset of digital technologies, the private copy they will make from the Internet is the same as buying a CD. It will be of the same quality. You have to get rid of the private copying exception to copyright," said Garnett.
The biggest concern of the makers of computers and decoders is Article 6 of the proposal which they believe would make illegal any new piece of consumer electronic equipment that wasn't compatible with devices that block piracy.
"We think that is barmy," said Michael Hart, an intellectual property lawyer at Baker McKenzie representing the consumer electronics lobby group EACEM.
"What it should cover is pirate devices but not every piece of consumer, telecoms and computer equipment. We think a bit more dialogue between everyone would be helpful. The parties have to sit down, calm down and try and make some progress," added Hart.