CD Wow!, the Hong Kong-based online retailer, has agreed to stop sourcing its CDs from Asia and other regions outside the European Union, which will add £2 to the retail price of its CDs.

The company took the decision in the face of legal action by the British Phonographic Industry (BPI), which announced today that it had settled its action.

Philip Robinson, director of CD Wow!, told the Financial Times: "It is hugely disappointing … It is very much the consumer who loses out."

Mr Robinson said the price of CDs would rise from £8.99 to £10.99 from Sunday.

Peter Jamieson, BPI chairman, said in a statement: "I am delighted that we have been able to resolve this case on agreed terms without the need for a trial."

The BPI admitted that the CDs imported by CD Wow! were genuine products bought from subsidiaries of UK record companies, but argued that they had been sold in the UK without their consent.

CD Wow! now faces similar legal action in Germany and other countries.

The settlement is the music industry's first success in its battle against parallel imports, where genuine CDs are purchased in one country before being sold in another without the consent of the copyright owner.

The BPI is also investigating Amazon, the online book and music retailer, and play.com, a Jersey-based music retailer, over parallel imports.

The BPI and CD Wow! released a joint statement after the settlement which read: "The record industry claimed that CD Wow! was obtaining sound recordings from outside Europe and selling them to UK and Irish consumers.

"As a result of the settlement CD Wow! has agreed that it will not sell CDs that have been first placed on the market outside Europe to UK and Irish customers.

"It will only sell CDs that have first been placed on the European market to UK and Irish customers. All other details of the settlement are confidential."

CD sales rose by 7.6 per cent in the UK last year according to Music Week, the industry magazine, despite a broader downward global trend. Critics say that this was due to the lower prices of online retailers and supermarkets, the FT reported.

CD Wow! has more than one million users worldwide each month and had an estimated turnover last year of about £100 million.