China's leading search engine, Baidu.com, has lost a lawsuit to provide free MP3 downloads, and is facing a payout of 10,000 dollars in compensation.

The Beijing Youth Daily reports that it had being sued by a Shanghai music company for infringing the copyright of hundreds of songs. Baidu has been forced to stop its online service from downloading links to the music copmany's songs, which may eventially lead to a shutdown of Baidu's MP3 search engine as more music companies follow suit.

However, Baidu argues it is only providing web links for internet users, not providing the download service, and therefore it is not guilty of the charges.

This is the first case of an internet portal being accused of offering free music downloads.

As internet use has soared in China, the music industry's revenue has fallen dramatically, largely as a result of MP3 downloads from unauthorised sources.