Following a meeting at 10 Downing Street with Tony Blair on Thursday, industry leaders welcomed the chance to rewrite crucial sections of the forthcoming Electronic Commerce Bill but worried they would not have enough time.
The opponents of current proposals to give law enforcement authorities access to e-commerce, led by the IT and banking sectors, were thrown into further disarray as differences emerged between themselves over the best solution.
The Government confirmed its change of heart on the bill on Friday, after news leaked of the Thursday morning meeting at Downing Street between Mr Blair, Home Secretary Jack Straw, Trade Secretary Stephen Byers, and executives from Microsoft, ICL, Cable & Wireless and the CBI.
The conflict centres on the issue of encryption, once a Cold-War secret but now considered necessary to provide security for transactions and scrambling messages on the internet.
On one side are the law enforcement agencies, represented most visibly by the National Criminal Intelligence Service, and on the other are high- street banks, the Post Office, internet service providers and big IT companies, including Microsoft.
The problem is that powerful encryption is too strong for modern computers to break and denies law enforcement agencies access to electronic information in their fight against serious internet-enabled crime. The solution currently proposed, dubbed key escrow, is to build a back-door weakness into encryption by giving a copy of a person's private encryption key to a "trusted third party" (such as a bank), which will give it to the police on demand of a warrant.
On Friday, DTI minister Michael Wills announced that key escrow, previously a plank of government policy, could be dropped. "Key escrow may not be the best option. We're looking to industry for better solutions," he said.
Mr Wills announced he would set up a joint government-industry taskforce to address the problem but has yet to reveal its composition.
Tim Sweeney, director-general of the British Bankers' Association, said making key escrow a requirement "would have hindered the development of e-commerce in the UK".
But industry is complaining about the short timetable. Nicholas Lansman, secretary-general of the Internet Service Providers Association, said: "The DTI has had three years to get this right; we've got three weeks."
n Daniel Sabbagh is senior reporter for `Computing'.