Ministers face an embarrassing showdown in court after the European Commission accused Britain of failing to protect its citizens from secret surveillance on the internet.

The move adds to claims that Britain is creeping towards a Big Brother state and could end with the Government being forced to defend its policy on internet privacy in front of judges at the European Court of Justice.

The legal action is being brought over the use of controversial behavioural advertising services which were tested on BT's internet customers without their consent to gather commercial information about their web-shopping habits.

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Under the programme, the UK-listed company Phorm has developed technology that allows internet service providers (ISPs) to track what their users are doing online. ISPs can then sell that information to media companies and advertisers, who can use it to place more relevant advertisements on websites the user subsequently visits. The EU has accused Britain of turning a blind eye to the growth in this kind of internet marketing.

Ministers were warned by the EU in April that if the Government failed to combat internet data snooping it would face charges before the European Court of Justice.

The European Commission made it clear this week that it is unhappy with the Government's response and began further legal action to force ministers to address the problem. Commissioners are disappointed that there is still no independent national authority to supervise interception of communications.

Europe's information commissioner Viviane Reding said that the aim of the Commission was to bring about a change in UK law. "People's privacy and the integrity of their personal data in the digital world is not only an important matter: it is a fundamental right, protected by European law," she said. "I therefore call on the UK authorities to change their national laws to ensure that British citizens fully benefit from the safeguards set out in EU law concerning confidentiality of electronic communications."

The Commission said the UK had failed to comply with both the European e-Privacy Directive and the Data Protection Directive. The Commission also criticised the Regulation of Investigatory Powers Act (Ripa) as it does not require that people give informed, specific consent to their communications being intercepted for purposes such as behavioural advertising, while sanctions under Ripa only apply when unlawful interception is intentional rather than simply unlawful.

A Home Office spokesman confirmed it had received the Commission's letter. Ministers will respond to the letter when they have had time to consider it fully.

The Commission received its first complaints over the issue in April last year following BT's trial. Users complained to the UK data protection authority, and the police. The Commission wrote to the UK authorities in July and, upon receiving its answers, "has concerns that there are structural problems in the way the UK has implemented EU rules".

The City of London Police dropped an investigation of Phorm last year in relation to BT's secret 2006/2007 trials because it would have cost too much money, been too complex and those taking part in the trials were curiously deemed to have given their "implied consent".