"We have won another battle in an ongoing war," said John Kennedy, chairman and CEO of the International Federation of the Phonographic Industries (IFPI). "We move forward with a spring in our step."

Kazaa follows other sites like Napster which now offers legal downloads.

Mark Mulligan, an analyst with Jupiter Research said the amount of damages that Kazaa are willing to pay demonstrates how big the service had become.

"$100m is half of the legitimate music downloads market in Europe," he said.

At its peak the site had more than four million simultaneous users. The Kazaa software has been downloaded 239 million times.

Legal fight

The decision by Kazaa follows a series of legal wrangles around the world. Last year an Australian court ruled that the file-swapping program encouraged users to breach copyright.

The Federal Court ordered Kazaa's owners, Sharman Networks, to modify the software to prevent further piracy.The modifications included a filtering system on 3,000 keywords to prevent users finding copyrighted material.

It was unclear whether the move prevented music piracy as many file-swappers stopped using Kazaa in favour of other networks.

The illegal music market is huge. A report by the IFPI provides a snapshot of music piracy.

It focuses on pirated CDs and illegal music downloads which are either swapped through peer-to-peer networks or downloaded from sites the IFPI says are illegal.

The report estimates that 20 billion music tracks have been downloaded. It highlights 10 countries that need to step up their fight in tackling music piracy.

Some of the worst offenders, says the IFPI, include Brazil and Canada. The two countries downloaded more than two billion tracks.

Other offenders, according to the report, include Italy which the IFPI estimates has 2.7 million illegal file sharers.

Counterfeit goods

The annual study also estimates that 1.2 billion fake CDs were sold in 2005, the same number as were sold in 2004.

"We're not sure whether we should be pleased that it has not increased or displeased that it has not gone down," said Mr Kennedy. "We're not proud or disappointed."

The IFPI calculates that the global traffic in illegal CDs is worth $4.5 billion (£2.4 billion), down $100m from 2004.

The IFPI points the finger at China as the largest producer of pirate discs. It says that 85% of discs produced in the country are illegal.

The IFPI also highlights Mexico as a hub of pirate material.

The North American country did not feature in last year's report of worst offenders. But in 2005 the IFPI report that "110 million physical pirate products" were sold in the country.

As a result, Mexico has become a focus for the IFPI. Last year the body launched a new initiative called Mexico Plus that saw the IFPI working with the authorities in Guadalajara to close pirate market stalls.

The initiative saw the number of pirate CD stands fall by 80% in the city and the number of legitimate music sales rise by more than a quarter.

The IFPI has also been fighting music piracy on the web, taking a number of individuals and high profile sites like Kazaa to court.

According to Mr Mulligan, some of their efforts are now having an effect.

"The market is now fragmenting. Unless you are an ardent downloader it is becoming harder to know where to go," he said.

Services like iTunes, Yahoo Music and Wippit offer an alternative.

The IFPI say the legitimate download market now consists of over 360 sites offering three million tracks for download.

The legal download market last year was worth $1.1 billion globally, they say.