The law was meant to protect children from explicit DVDs
Retailers who sell violent video games and 18-rated DVDs to children cannot be prosecuted because of a legal blunder 25 years ago.
Dozens of prosecutions under a 1984 Act have been dropped because the government of the day failed to notify the European Commission about the law.
But previous prosecutions will stand, according to the Department for Culture Media and Sport (DCMS).
The Lib Dems said the error had "thrown film censorship into chaos".
The Video Recordings Act (VRA) was brought in by Margaret Thatcher's government and set down that videos and video games must be classified and age rated by the British Board of Film Classification.
It made it illegal to sell violent video games to children and the most explicit adult films could be sold only in licensed sex shops.
Culture Media and Sport Minister Barbara Follett has written to the industry bodies to inform them the act was "no longer enforceable".
In her letter, she said: "Unfortunately, the discovery of this omission means that, a quarter of a century later, the VRA is no longer enforceable against individuals in United Kingdom courts."
Mrs Follett said the government hoped to remedy the "unfortunate situation" as quickly as possible.
She asked the industry bodies to handle the situation with "care and sensitivity" to ensure "minimal" advantage is taken of the loophole.
The loophole means no-one can be prosecuted until the law is passed again and that will take three months.
A spokeswoman from the government department said retailers had agreed to keep to the rules on a voluntary basis and previous prosecutions will still stand.
"Our legal advice is that those previously prosecuted will be unable to overturn their prosecution or receive financial recompense," she said.
Ministry of Justice figures for 2007, the latest available, show 87 people were convicted under the act for offences including supplying material which should be sold only in sex shops and selling unclassified work.
The Liberal Democrat's culture spokesman Don Foster said: "The Conservatives' incompetence when they were in government has made laws designed to prevent video piracy and protect children from harmful DVDs unenforceable and thrown film censorship into chaos.
"This must be a massive embarrassment to the Tories, especially as David Cameron was the special adviser to the home secretary in 1993 when the law was amended."
But the shadow culture secretary Jeremy Hunt said it was "outrageous" such an administrative error could go unnoticed for so many years.
"Much of the problem would have been avoided if they had sorted out the classification of video games earlier, as we and many others in the industry have been urging them to do," he added.
The error was discovered during work on the UK government's Digital Britain project, which aims to boost broadband and new media in the UK.