Seven million people could be criminalised under government plans to crack down on internet piracy, to be included in this autumn's Queen's Speech. The illicit downloading of music and films on the internet, a practice engaged in by one in 12 of the population, could lead to severe restrictions on internet access and a fine of up to £50,000.

Lord Mandelson, the Business Secretary, is said to be persuaded by the argument for tough laws to curb illegal file-sharing after an intensive lobbying campaign by influential people in the music and film industry.

But Tom Watson, the former minister for digital engagement, today criticises the proposed crackdown as extreme and calls for a more measured approach that would target those who uploaded illegal content, rather than the millions who downloaded the files.

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His intervention comes in the week after the Pirate Party, which won a European parliamentary seat in Sweden in June on a platform of legalising internet file-sharing, announced it would fight the next general election in Britain.

The new Pirate Party UK was reported to be recruiting as many as 100 people every hour since its launch last week. Among its supporters was Stephen Fry, who applauded the new party on Twitter. Yesterday the organisers said they had 259 fully paid-up members, although hundreds more had shown an interest in joining.

When the Digital Britain report was published in June, the Government appeared to row back from a hardline stance on illegal downloading. But a consultation document on the latest plans, which could be tagged on to a Bill in the next Queen's Speech, makes it clear that ministers favour tough sanctions.

Whitehall sources said that Lord Mandelson has been persuaded by the need to take action to prevent copyright being breached. But Mr Watson, writing below, says: "Not only do the sanctions ultimately risk criminalising a large proportion of UK citizens, but they also attach an unbearable regulatory burden on an emerging technology that has the power to transform society, with no guarantees at the end that our artists and our culture will get any richer.

"Working on the safe assumptions that (a) people like downloading music from the internet, and (b) most people would prefer not to break the law, we should aim to map a way forward for businesses to take financial advantage of the digital market."

Under the proposed laws, Ofcom, the industry regulator, would be given powers to require internet service providers to collect information on those who downloaded pirate material. The data would be anonymous, but serious repeat infringers would be tracked down through their computer ID numbers.

Individuals would be hit by restricted internet access – from slowing down broadband to blocking access altogether – and could face fines of up to £50,000.

The Department for Business consultation document admits that getting internet service providers to track down repeat offenders "is new and will be contentious". Nevertheless, the crackdown has the backing of leading figures in the music, film and publishing industries. The singer Lily Allen has said: "If what the consumer wants is good music, then they are going to have to start paying for it. There are people really struggling to make their way; they're getting dropped much quicker, not being given the opportunity to make second albums. The only people responsible are those who are downloading music illegally, because there is no money going towards the bands any more."

But those on the other side of the argument say that file-sharing – sometimes termed "p2p" or "peer to peer" – is merely widening access to a piece of music or film and does not equate to theft. Thom Yorke, the lead singer of Radiohead, has in the past given implicit support for internet piracy. He told an interviewer: "A lot of the time, the reason that people pirate is they want access to good music and they don't get it because the radio is so shit."

Andrew Robinson, the leader of the Pirate Party UK, said yesterday that the new laws would be a gross intrusion into civil liberties, and would penalise people in the same household as those who had broken the law.

Mr Robinson, 40, a graphic designer and part-time musician, is planning to stand in his home constituency of Worcester, where the Labour MP Michael Foster is defending a majority of 3,144. He said: "This is about proving to the major parties that there are so many votes to be had in adopting policies like ours. The pro-copyright lobby is very powerful."

The Pirate Party UK was officially recognised as a political party by the Electoral Commission last month. It is not linked to the Pirate Bay internet "torrent" site but is sympathetic to its cause. Pirate Bay does not host illegal content but provides links to files of music and videos held on individuals' computers.

Additional reporting by Alex Steger and Eve da Silva