Barbara Roche, the minister for industry, is looking at establishing an independent panel to investigate complaints as part of a review on regulating the Internet due to be published later this year.
The proposal could meet opposition from both civil liberties laws and those for whom the Internet represents the last bastion of individual freedom. Malcolm Hutty, spokesman for the Campaign Against Censorship of the Internet in Britain, said: "It [the complaints panel] is clearly aimed at being a board which can dictate what is acceptable and not acceptable ... which is highly damaging. Any such panel is likely to be much stricter than the law of the land."
The Department of Trade and Industry (DTI) says it is responding to the concerns of British Internet service providers (ISPs) who are fearful of being dragged into libel actions over contentious material published on their sites.
The new body would handle complaints about material published in talk groups as well as web-sites but would have no remit for dealing with service providers outside the UK.
The complaints panel, which would only examine civil disputes, could be an extension to the Internet Watch Foundation(IWF) which investigates child pornography. The IWF is funded by the Internet industry, supported by the Government and advised by police. Complaints to its hotline have resulted in 2,000 items being removed from UK sites in a year.
A DTI spokeswoman said last night: "It is envisaged that the consultation [with the Internet industry and users] will result in the extension of the IWF's current remit to include matters such as defamation and copyright infringement."
Because service providers currently have no official guidance on civil disputes they are increasingly choosing to remove contentious sites rather than risk being sued for libel.
Their actions have prompted fears that arbitrary censorship will suppress information published in the public interest.
Lord Avebury, the human rights campaigner, said: "There's a great deal of censorship going on by the service providers, not because they wish to, but because of the uncertainties in the law. They have not got the time to look at allegations and are taking the easy way out and just censoring it." He said that customers who lost their sites would be able to bring actions against the service providers for breach of freedom of expression under the European Convention on Human Rights, which is being incorporated into British law.
Demon, one of Britain's largest ISPs, recently decided to remove a web- site which contained allegations about a religious group, after complaints that some of the material was libellous.
The site contained information about the Friends of the Western Buddhist Order, which has provided guidance to the Department for Education on religious teaching in schools.
The Internet Service Providers Association, which represents more than 50 British ISPs, said last night that it expected that the complaints body would be funded privately but run by people independent of the industry.
David Kennedy, chief executive, said: "People who thought there was some defamatory material would report to this third party which would make a judgement ... and they could advise the ISPs to act." He said that if ISPs refused to accept the advice to remove a site there would be a "strong argument" that they were then jointly liable for publication.
Service providers have become increasingly concerned following a landmark judgment in Germany last month. The former head of the German subsidiary of Compuserve received a suspended prison sentence after child, animal and violent pornography was found on sites provided by his company.