In a whimsical reference to James Bond, it will be called In-Q-It, after the mythical Major Boothroyd, codenamed Q, who developed gadgets for the fictional British secret agent.

The new company is named after a James Bond character

The firm, with an initial capital of $28m, will be headed by Gilman Louie, who founded computer game company Microprose before joining toy company Hasbro.

The aim is to ensure that the intelligence services have access to the latest Internet technology, much of which is being developed by small start-up companies in California.

"The rapid and unprecedented pace of technological change and the evolution of our national security environment dictates a change in the way the intelligence community does business," said CIA Director George Tenet.

Internet technology

The company will work openly, seeking partners to develop new Internet technologies; improve security and privacy technologies; nurture data mining techniques; and improve the CIA's computer systems.

The move is a recognition that the large companies traditionally funded by the US government to do defence work may no longer be at the cutting edge of technology.

"The current model isn't working. The technology world has totally changed and one day the CIA woke up at realised they needed to go through the same change," said Mr Louie.

He said that improved technology might have prevented such incidents as the NATO bombing of the Chinese embassy in Belgrade, caused by an outdated map.

Privacy concerns

The CIA is believed to be particularly concerned about the issue of encryption and security on the Internet, which has been the subject of much debate within the government.

Attempts to ensure that police and intelligence services have access to encrypted messages have been resisted by civil liberties groups and Internet entrepreneurs concerned about the threat to privacy.

In a policy reversal, the Clinton administration has said it will now allow the export of 'robust' encryption technologies.

Earlier, FBI Louis Freeth had said that "there is unanimous agreement that the widespread availability and use of robust, non-recoverable encryption ultimately will devastate our ability to fight crime and prevent terrorism."

The CIA would also like to improve its ability to search its own data base for information, which might make it easier to discover spies in its own midst, for example.