By Darren Waters
Technology editor, BBC News website
The ad-serving system profiles the sites people visit online
The European Commission has started legal action against Britain over the online advertising technology Phorm.
It follows complaints to the EC over how the behavioural advertising service was tested on BT's broadband network without the consent of users.
Last year Britain had said it was happy Phorm conformed to European data laws.
But the commission has said Phorm "intercepted" user data without clear consent and the UK need to look again at its online privacy laws.
In a statement, Phorm said its technology was "fully compliant with UK legislation and relevant EU directives".
It added that it did not believe the Commission's legal action would have "any impact on the company's plans going forwards".
At the heart of the legal action by the EC is whether users have given their consent to have their data intercepted by the advertising system.
A spokeswoman from the commission told BBC News that the EC wanted the UK to ensure there were procedures in place to ensure "clear consent from the user that his or her private data is being used".
At present, UK law only covers "intentional" interceptions and requires there only to be a "reasonable grounds for believing" that consent to interception has been given.
"Technologies like internet behavioural advertising can be useful for businesses and consumers but they must be used in a way that complies with EU rules," the EU's Telecoms Commissioner Viviane Reding said in a statement.
She added: "We have been following the Phorm case for some time and have concluded that there are problems in the way the UK has implemented parts of the EU rules on the confidentiality of communications."
Ms Reding said Britain needed to to change its national laws to ensure there were proper sanctions to enforce EU confidentiality rules.
Unless Britain complies, Ms Reding has the power to issue a final warning before taking the country to the 27-nation EU's top court, the European Court of Justice. If it rules in favour of the European Commission, the court can force Britain to change its laws.
BT admitted last year it had tested Phorm's technology on its network with thousands of customers without asking for their consent or informing them of the trials. It later carried out further trials of the service, which it markets as Webwise, with the consent of users.
BT and Phorm have previously said they sought legal advice before carrying out the first trials.
Phorm's works by "trawling" websites visited by users whose ISPs have signed up to the service and for whom the technology is switched on, and then matches keywords from the content of the page to an "anonymous" profile.
Users are then targeted with adverts that are more tailored to their interests on partner websites that have signed up to Phorm's technology.
The technology differs from other behavioural advertising systems which tend to use data only from partner websites visited by users, and do not work in conjunction with internet service providers.
The service has proved controversial for some campaigners who believe it breaks UK data interception laws.
Nicholas Bohm, general counsel for the Foundation for Information Policy Research, which has led the criticisms of Phorm's technology, said he welcomed the EC's intervention.
"It will in effect apply pressure to the information commissioner and the Home Office and maybe even the Crown Prosecution Service in its contemplation of the illegality of the BT trials."
He said FIPR welcomed the emphasis on user consent, but also stressed that the body felt that website owners too should give their consent for their sites to be trawled by Phorm's technology.
"It is pleasing to see the EC is taking this issue more seriously than UK government departments here," he added.
Last year, Phorm received clearance from the Home Office and police closed a file on BT trials of the technology which looked into their legality.
The UK government said last year the technology could only be rolled out if users had given their consent and it was easy for people to opt out.
The European Union Directive on Privacy and Electronic Communications requires member states to ensure the confidentiality of their communications and related traffic data. States must, it says, prohibit interception and surveillance unless the users concerned have given their consent.
The commission has also said it is concerned that the UK does not have an independent national supervisory authority to deal with the intentional interceptions of user data.
Mr Bohm suggested that the Information Commissioner's role could be widened to deal with the issue of interception of user data.
Jim Killock, executive director of the Open Rights Group said: "There are big legal questions surrounding BT's use of Phorm, so we welcome the EU taking the government to task.
"BT should respect everyone's privacy and drop their plans to snoop on the internet before they damage their own reputation further. Websites should protect their users and block Phorm now."
BT declined to comment on the EC's actions.