But it is warning industry that it has three weeks to come up with an alternative - or the proposal may be revived.

As expected, a consultation paper from the Department of Trade and Industry waters down demands over security.

A task force is being set up, comprising civil servants and industry representatives, to try to come up with another way forward.

Originally the government's proposed E-Commerce Bill contained demands that the "key-escrow" standard be applied to online transactions to give police the "keys" to decode encrypted information travelling over the Internet.

The dilemma faced by government regulators is how it can monitor transactions to keep a lid on electronic crime without stifling business efforts to make the most of this promising new marketplace.

Selling to customers, buying from suppliers and finding new clients via the Internet is expanding at rapid pace in the UK and Europe.

Brake on business

Business groups, especially the computer industry, were strongly opposed to the government standard. They say few business partners and customers would trust encryption when the key had been given to someone else, and criminals would never be inclined to give their keys away at all.

The encoding of electronic transactions is necessary to stop third parties defrauding traders by accessing financial data or obtaining other commercially-sensitive information.

However, to combat criminal transactions and messages authorities need to have an ability to monitor who is sending what to whom.

The National Crime Intelligence Service supports the inclusion of the key escrow standard in the new laws.