One of the most contentious parts of the controversial digital economy bill was voted down by the House of Lords last night – only to be replaced by a clause that campaigners say is even more draconian.

The Liberal Democrats forced through a surprise amendment to the bill's notorious clause 17 on Wednesday – in a move that dealt a defeat to the government but troubled critics, who suggest it will have the opposite effect that its creators intend.

Instead of sweeping new powers that threatened sweeping alterations to British copyright law, the Lib Dems added a clause that gives extra oversight to the high court.

The new proposal – which was passed in the House of Lords by 165 votes to 140 – gives a high court judge the right to issue an injunction against a website accused of hosting a "substantial" amount of copyright infringing material, potentially forcing the entire site offline.

Putting forward the amendment, Lib Dem peer Lord Clement-Jones said that it would placate concerns over the so-called "three strikes" rule – which could see those accused of sharing files illegally online having their internet connections cut off – and added that it was a "more proportionate, specific and appropriate" way to approach infringement than the previous proposals made by the government.

"I believe this is going to send a powerful message to our creative industries that we value what they do, that we want to protect what they do, that we do not believe in censoring the internet but we are responding to genuine concerns," he said.

But instead of making the proposed system more transparent and accountable, critics say it will simply leave it open to abuse.

"This would open the door to a massive imbalance of power in favour of large copyright holding companies," said Jim Killock, executive director of the Open Rights Group. "Individuals and small businesses would be open to massive 'copyright attacks' that could shut them down, just by the threat of action."

"This is exactly how libel law works today: suppressing free speech by the unwarranted threat of legal action. The expense and the threat are enough to create a 'chilling effect'."

In particular, there are concerns that the amendment could follow in the footsteps of America's controversial Digital Millennium Copyright Act, which has been accused of encouraging companies to file bogus copyright claims to block material they dislike.

The high costs and dangers of dealing with copyright claims in court mean that many web hosts simply take down the material in question without checking whether the copyright case is legitimate – even going as far as shutting down entire websites in some cases.

Just last week the well-known whistleblower website Cryptome was taken offline when Microsoft attempted to suppress the publication of its so-called "spy guide" by issuing a copyright claim under the DMCA.

When the site's service provider received Microsoft's request, it not only blocked the document in question but also effectively removed the entire Cryptome site from the web.

Microsoft eventually retracted its claim in order to let the site – which had stayed online for years despite numerous run-ins with other companies and US government agencies – go back online.

The new amendment could also have dire implications for websites like YouTube, where users can upload copyright-infringing material without the knowledge of the site's owners.

The video sharing site, which is owned by Google, is already subject to a $1bn lawsuit by US media giant Viacom – but argues that it cannot screen every video that goes onto its site to check whether it infringes copyright. Given the large amounts of material hosted on the site, however, the whole thing could potentially be blocked by the high court.

Lilian Edwards, a cyberlaw expert at Sheffield University, said that the new proposals had some benefits but also had sweeping downsides.

"For the first time, Sony and the rest can now go to court and demand that every ISP in the UK blocks YouTube," she wrote.

"There will in reality be no, or few, court applications - just non-publicised notifications. This is essentially legislation for cover extralegal censorship for the benefit of entrenched private interests."

Such concerns mark only the latest controversy attached to the digital economy bill, which has caused upset since it was first proposed last year.

On Monday, Lord Puttnam said that the scheme was being rushed through parliament without sufficient scrutiny, and that legislators were subject to an "extraordinary degree of lobbying" from copyright holders.

The bill must pass through the House of Lords before it can be put before the Commons and turned into law. Reading continues in the Lords on Monday.