BT has lost its legal battle to charge internet service providers for using hyperlinks.

In a test case, the British telecoms firm took the American internet service provider Prodigy to court, claiming it had invented the highlighted text that allows users to click from one website to another and was therefore entitled to royalties.

US judge Colleen McMahon has now ruled that the ISP was not infringing a patent filed by BT more than 25 years ago and supported Prodigy's motion to have the case dismissed.

It will be an embarrassing blow for BT which has won few friends for what was seen in the industry as an attempt to hold the internet to ransom.

Disappointed

If it had been successful it would have had far-reaching effects on the whole industry.

BT said it had not entirely given up the fight.

"We are disappointed and are currently perusing the 27-page ruling," said a spokesman.

The setback will be especially disappointing for BT chairman Sir Christopher Bland.

In February he bullishly defended the case. At the time he said: "The idea that we should abandon the suit for the feel-good factor for ISPs is bizarre."

Judge McMahon found several problems with the argument proffered by BT, most importantly that the internet had no central computer as described in the original patent.

As part of its defence, Prodigy produced a 1968 video by Stanford computer researcher Douglas Engelbart apparently demonstrating hypertext technology, eight years before BT lodged its patent in the US.