The controversial online music-swapping service, Napster, has clinched a preliminary deal with US songwriters, pledging £18m in damages for past infringements.

The deal is a major step forward for the music service and clears the way for a legitimate service before the end of the year.

The terms of the settlement will see Napster shelling out £18m immediately to cover past unauthorised use of music. It will also pay out £7m against future royalties.

When the new service is launched, the music publishing associations will receive one third of royalties, with record companies receiving two thirds.

"The American community and online music community has taken a giant leap forward," said George David Weiss, the chief executive of the Songwriters Guild of America and composer of What a Wonderful World and other standards.

"This settlement, which only a few weeks ago seemed a near impossibility, will hopefully lead to immediate and unprecedented growth in the licensed use of music on the internet," he added.

The wrangle with songwriters and publishers was the last stumbling block to Napster launching a legal service. It already has the record companies on side after reaching a settlement earlier this year following a series of protracted lawsuits.

The new Napster service will offer music from hundreds of independent music labels. It is also part of the consortium developing MusicNet, the joint venture from BMG, EMI and AOL.

The next six months will see huge competition in the online music market, with the launch of several other services from major record labels and independent operations such as BT Openworld.