National security and law enforcement officials have long resisted the move, saying it could be used by criminals and terrorists to conceal their activities.

US Attorney-General Janet Reno said the change would allow American industry to "compete fairly in the international marketplace, while maintaining controls essential for national security".

But she admitted the decision "will mean that more terrorists and criminals will use encryption."

The move, a major change of policy, is seen as vital to the development of Internet-based "e-commerce".

Encryption - necessary for the protection of credit card and other personal details - is the key to safe trading on the Internet.

New rules

Under the new policy exporters can sell the most powerful encryption tools to private and commercial users overseas, after a one-time technical review of their products.

Civil libertarians have clashed with the government over encryption

However, they need White House approval in the case of foreign governments and military interested in the scrambling technology.

In addition, seven countries are banned from receiving the technology, including Libya and Iraq.

American software companies have welcomed the announcement, saying it allowed them to compete in the global market.

Effectively, President Clinton bowed to pressure from both the high-tech companies and many in Congress, who said the current export restrictions were leaving the market wide open to foreign software firms.

The FBI and other agencies put a brave face on their defeat - helped by an extra £80m of government money to improve the bureau's own code-breaking abilities.