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The EU commissioner Viviane Reding wrote to the Government in mid-July asking for clarification over Phorm's Webwise system and whether or not it contravened EU data laws.

Privacy advocates have argued that the trials of the system conducted by BT were illegal, as users were not informed that their browsing was being monitored. The Government has until the end of August to formulate a response.

Phorm's Webwise system tracks user's browsing habits in order to provide more accurate targeted advertising on websites that work with the company. BT, Virgin Media and TalkTalk have all agreed to work with Phorm.

The Information

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Commissioner's Office in the UK ruled that no further action would be taken over BT's two secret trials of the system.

BT is expected to begin another trial "imminently", monitoring the browsing habits of 10,000 of its customers.

"We will continue to maintain close contact with Phorm and BT throughout the trial," says an Information Commissioner's Office spokesperson. "Clearly the trial should reveal whether this is a service that web users want, whether it is privacy friendly and that users are comfortable with the privacy safeguards put in place by Phorm."

Phorm says it is confident of overcoming any regulatory concerns. "We are aware of a letter from the EC to the UK Government regarding the Government's implementation of EU Directives on data privacy.

"Any such letter is a matter between the Commission and the EU member state. However, we are in active dialogue with the European Commission and the UK Government. We will continue to work with legislators and regulators to ensure that our legally-compliant system is deployed in a way that exceeds current internet advertising industry standards for privacy online."