The music industry moved last night to heal a rift over illegal filesharing as artists including Lily Allen, George Michael and Sandie Shaw voted to support a "three-strikes" rule that would see online pirates have their broadband connections constrained.

After a three-hour meeting in London, the Featured Artists Coalition, which emerged as a breakaway lobby group in the summer, backed the government's proposed introduction of "technical measures" to combat the rising tide of copyright theft. If they ignore two warning letters, persistent illegal filesharers should have their broadband connections throttled "to a level which would render filesharing of media files impractical while leaving basic email and web access", according to a statement after the meeting.

Earlier in the day, the industry's umbrella group UK Music sent Lord Mandelson, the business secretary, a letter calling for persistent offenders to be given written warnings. As a last resort, the letter added, flagrant offenders should face having their connections suspended.

Signed by lobby groups representing musicians, managers, music labels and record companies – including the Musician's Union and rights collection agency PRS – the letter said: "We support government proposals which would see internet service providers (ISPs) send notifications and apply technical measures to impede and discourage the use of unlicensed peer-to-peer networks and to encourage the use of legitimate services.

"We agree that a clear distinction should be made between how technical measures are applied to the casual infringer, compared to how they are applied to the persistent infringer, with temporary suspension of broadband accounts being applicable only as a last resort."

The letter and the consensus reached by FAC come just days ahead of the closing of the government's consultation on how to tackle online piracy, which was sparked by June's publication of the Digital Britain report.

A music industry source said last night: "We are delighted this historic agreement has been reached."

Speaking after the meeting in the Air Studios in north London, FAC board member and Radiohead guitarist Ed O'Brien described the outcome as "groundbreaking".

"The last week or so there has been a perceived split in our opinions as artists ... we all came together," he said. "I think everyone has listened to one another and been human beings and reasonable."

Earlier in the day Lily Allen, one of the few younger artists to speak out against online piracy, said she was dropping her public campaign against copyright theft because "the abuse was getting too much". She had set up a blog "It's Not Alright" – in reference to her first album Alright, Still - collating artists' views after her comments that "filesharing is a disaster" for new talent. In its statement last night the FAC, expressed support for Allen and condemned "the vitriol that has been directed at her in recent days".

The FAC still does not support persistent illegal filesharers having their connections suspended, but its support for "a final sanction of the restriction of the infringer's bandwidth" does mark a significant change in its tone. But O'Brien denied any climbdown. "There is no talk of capitulation, everybody's really happy," he said. "The outcome is entirely consistent with the way that we have been talking and our concerns."

Yesterday, Mandelson, who last month shocked consumer groups and internet service providers with his anti-piracy plan, warned it is vital to the economy to protect the UK's creative industries. "We have got great talent but we have got to nurture it and we have got to protect it and we have got to ensure that people who become performers or work in these industries get properly compensated," he said after a visit to the Brit Academy in Croydon, south London. Asked about his proposal that illegal filesharers should have their connections cut-off, he added "we are talking about a temporary, possibly short-lived, suspension of persistent unlawful filesharers after many written notifications with a chance to appeal."

"It does not get more modest or more fair than that, but we have a responsibility to put these options forward for people to debate and consider because we want to see talent protected. We want to see talent properly compensated otherwise that talent is not going to produce the music that people want to hear in this country."

But the ISPs are adamant they will not pick up the bill for securing the future of the music industry. John Petter, head of BT's consumer division, warned yesterday that suspending the connections of users caught illegally downloading copyrighted files could cost £1m a day – or £25 a year for every broadband customer in the country. BPI chief executive Geoff Taylor, however, angrily retorted that BT's figures are "unsubstantiated" and the company should "recognise that reducing illegal use of its network is a cost of running a socially responsible business".

"BT is clinging on to an old business model which is supported by illegal downloading. That's not only unfair to artists and creators, but penalises BT's many customers who use the internet legally," he said.