"Down Under", the 1980s smash hit about a land where "beer does flow and men chunder [vomit]", has earned millions of dollars for Men at Work and their record labels.

But its distinctive flute riff was plagiarised from an Australian folk tune composed for a Girl Guides competition 75 years ago, a court in Sydney ruled yesterday.

The Supreme Court found that the riff was unmistakeably similar to the four-bar children's song "Kookaburra Sits in the Old Gum Tree", penned by a Melbourne teacher, Marion Sinclair, and now owned by a publishing firm, Larrikin Music.

The judge ordered the "Down Under" songwriters, Colin Hay and Ron Strykert, and the band's labels, EMI and Sony BMG, to pay compensation and back royalties to Larrikin.

The sums have yet to be determined but lawyers said that they could run into millions of dollars. "Down Under", which has become an unofficial Australian anthem, sold millions of copies around the world after being released in 1983. The theme tune of the Australian yachting team which won the America's Cup that year, it also featured in the closing ceremony of the 2000 Sydney Olympics.

Adam Simpson, Larrikin's lawyer, hailed the ruling as "a big win for the underdog", and said the publisher would be seeking up to 60 per cent of the song's earnings.

Hay, Men at Work's lead singer, said that the judgment had "some pretty serious financial repercussions". The parties will return to court later this month to discuss costs.

"Down Under" and the album Business As Usual topped the British, Australian and American charts in early 1983, and Men at Work won that year's Grammy Award for Best New Artist.

Hay did not deny that the band's flautist, Greg Ham, used two bars from the campfire favourite about the native Australian bird. However, he said that they were added after the original song had been composed. "I'll go to my grave knowing 'Down Under' is an original piece of work," he said. "It was a musical accident that happened."

But the judge, Justice Peter Jacobsen, said that while the flute riff had a markedly different "feel" and musical context in "Down Under", he had concluded that it "replicates in material form a substantial part of Ms Sinclair's 1935 work."

He said it was clear that Ham had deliberately plagiarised it "for the purpose and with the intention of evoking an Australian flavour".