Britain's internet censor has backtracked on its decision to ban a Wikipedia page for containing a "potentially illegal" image of a naked child.

Over the weekend it emerged that the Internet Watch Foundation, which operates a blacklist to screen out images of child abuse that is used by the majority of British internet providers, had banned the image of a 32-year-old album cover by German rock group The Scorpions.

The decision resulted in a technical glitch which prevented thousands of British web surfers from editing any pages on Wikipedia, as well as confusion over why the image was deemed "potentially illegal" – particularly since the album itself has been on sale in high street shops for more than 30 years.

But after conducting a review of the decision, and amid protests from the Wikimedia organisation on Monday, the IWF today said that it would make the unprecedented decision to reverse its position and remove the image from its blacklist.

In a statement, the IWF said that it had taken a number of factors into account, as well as representations from Wikipedia.

"The IWF board has today considered these findings and the contextual issues involved in this specific case, and – in the light of the length of time the image has existed and its wide availability – the decision has been taken to remove this web page from our list," it said.

Although the organisation "confirmed that the image in question is potentially in breach of the Protection of Children Act, 1978", it also said that further reports concerning the image would be ignored if the files were hosted abroad. However, it said it could be blocked again if they are on UK-based web servers.

The article in question, about the Virgin Killers album from 1976, included an image of the record's controversial cover – which featured a young, naked girl with her genitals obscured only by a crack in the camera lens. Although the cover caused a storm at the time, and was later replaced by a more family-friendly alternative, it was never banned in Britain or the United States.

The IWF acknowledged that its decision to block the image had the opposite affect than intended – resulting in the image being spread further around the internet, instead of removing it.

"IWF's overriding objective is to minimise the availability of indecent images of children on the internet, however, on this occasion our efforts have had the opposite effect. We regret the unintended consequences for Wikipedia and its users," it said.

The ban affected users of some of Britain's biggest ISPs, including Virgin Media and Be internet, and led to criticism of the way the IWF operates. Although not an official censorship body, the Cambridge-based organisation has become the UK's de facto online watchdog, largely focused on preventing images of child abuse from being accessed by British users.

The reversal is a surprising move, because it opens up the possibility that any site which finds itself blocked could appeal against the decision and claim that its content is, contextually, artistic.

It also throws into question the way the banning system – which is carried out by a four-strong team of analysts who work with the police's Child Exploitation and Online Protection (Ceop) unit - is applied.