BT has abandoned plans to roll out Phorm's controversial web monitoring and profiling system across its broadband network, claiming it needs to concentrate resources on network upgrades.

Privacy activists have greeted the news as a victory for their campaign against the firm, which was sparked by revelations in The Register that BT had secretly trialled Phorm's advertising targeting system on tens of thousands of customers.

Alex Hanff, a prominent member of the campaign, who was recently publicly attacked by Phorm on its rebuttal website, said: "I am obviously ecstatic. My heartfelt thanks go to everyone who has been involved."

BT's announcement comes a day before MPs and peers of the All Party Parliamentary Communications Group are due to begin an investigation of internet privacy. Their intervention follows the EU's move to sue the UK government over its alleged failure to properly implement European privacy laws with respect to the trials, drawing further bad publicity to the venture.

The decision deals a massive blow to Phorm. At the time of writing, its shares were trading down more than 25 per cent at £3.53.

BT Retail is the largest ISP in the UK with about 4.8 million subscribers. It was a close partner in the development of Phorm's technology. Stratis Scleparis - chief technology officer at BT Retail at the time of the secret trials - was convinced enough of the money-making potential of the system to take a job and share options with the smaller firm.

BT's public statement today adopted Google's preferred "interest based advertising" terminology. It made no mention of the fierce reaction to its relationship with Phorm.

"We continue to believe the interest based advertising category offers major benefits for consumers and publishers alike. However, given our public commitment to developing next generation broadband and television services in the UK, we have decided to weigh up the balance of resources devoted to other opportunities," it said.

"Given these resource commitments, we don't have immediate plans to deploy Webwise today. However, the interest based advertising market is extremely dynamic and we intend to monitor Phorm's progress with other ISPs and with Webwise Discover before finalising our plans."

Webwise Discover is a sideline in content targeting announced last month.

In a statement to investors, Phorm sought to soothe worries BT's decision may jeopardise its business. It was also forced to sell a large chunk of equity at a much reduced price last month, in order to maintain operations.

"We continue to focus considerable effort on faster moving overseas opportunities. In so doing we have already minimised our dependency on the deployment by any single ISP or in any particular market," it said, adding that it was "engaged" with ISPs in 15 worldwide markets.

Virgin Media, which has not carried out any network trials of Phorm's technology, issued a statement reacting to BT's decision. It signed a memorandum of understanding with Phorm, similar to BT's, as did TalkTalk. These were not commitments to deploy the system however.

It said: "We continue to believe interest-based advertising has potentially important benefits for consumers, internet service providers and website owners. However, given the fast moving nature of the sector, Virgin Media intends to extend its review of potential opportunities with suppliers, including Phorm, prior to making any commitment to launch any of these technologies.

"We recognise some consumers have significant concerns about the potential implications of interest-based advertising for their privacy. Virgin Media is committed to ensuring that any future deployment complies not only with the relevant legal requirements but - as an absolute minimum - the best practice guidelines contained in the Internet Advertising Bureau's recently published code of practice."

The cable firm said it would be open with customers about its plans as they develop.

Phorm's June fundraising round brought in £15m. It has predicted it will spend £1.1m per month this year for zero revenue, although its last financial report revealed it had made cuts to stem even greater losses last year. ®