Grokster has vowed to return with a legal downloading service

Under the deal, Grokster is permanently banned from taking part in the spread of copyrighted music and movie files.

It agreed to stop activity that leads to copyright infringement, as well as paying $50m (£28.7m) in damages.

Grokster's decision has been seen as a victory for the entertainment industry's fight against online piracy.

Grokster's website was changed on Monday and now says its existing peer-to-peer (P2P) service was illegal.

"The United States Supreme Court unanimously confirmed that using this service to trade copyrighted material is illegal," a statement on its website said.

This settlement brings to a close an incredibly significant chapter in the story of digital music

Mitch Bainwol, Recording Industry Association of America

"Copying copyrighted motion picture and music files using unauthorised peer-to-peer services is illegal and is prosecuted by copyright owners," it added.

Piracy charges

The decision comes four months after a US Supreme Court ruling that file-sharing services can be held liable for actions of their users.

In June, justices ruled that the entertainment industry could file piracy lawsuits against technology companies caught encouraging customers to steal music and films over the internet.

"This settlement brings to a close an incredibly significant chapter in the story of digital music," Mitch Bainwol, head of the Recording Industry Association of America, said in a statement.

"This is a chapter that ends on a high note for the recording industry, the tech community and music fans and consumers everywhere."

Brand survival

However the settlement, submitted at a Los Angeles court, will not mean an end to illegal file-sharing using Grokster software.

Grokster users will still be able to copy music, movies and software directly from each others' hard drives, as the decentralised nature of most peer-to-peer software makes it impossible to control once it is released on the internet.

And the sharing of copyrighted material shows few signs of slowing down. An average of 9.2 million users were logged on to peer-to-peer networks in October, up from 6.3 million a year ago, according to online analysts BigChampagne.

Its co-defendant in the long-running case - Streamcast Networks - has also vowed to continue fighting the lawsuit launched by major US record companies, film studios and music publishers.

The Grokster brand is expected to survive. A statement on its site says it "hopes to have a safe and legal service available soon".

Reports suggest the group is in the process of being sold to legal downloading site Mashboxx, and a legal fee-charging Grokster service could be available within 60 days.

Mashboxx, which signed a licensing deal with music giant Sony BMG in June, is partly headed by former Grokster president Wayne Rosso.