Global music sales fell 7 per cent last year to $32bn amid rampant illegal internet downloading and CD copying, according to new industry figures released on Wednesday.
The downturn, the third consecutive decline in annual music sales, has increased pressure on leading music companies such as EMI, Universal and BMG to find a rapid technical solution to piracy.
Officials at the IFPI, the industry association representing 1,500 music companies in 76 countries, said it was stepping up its fight against illegal CD factories after seizing 34m pirate CDs last year.
It is also encouraging music companies to support fledgling on-line subscription services, which offer legitimate internet music files.
Nevertheless, the association warned that music sales were also being adversely impacted by sales of DVDs and interactive games.
Jay Berman, chairman and chief executive of IFPI said: "Widespread use of illegal sites, made easier with the growth of broadband access in the major markets, is affecting an industry that is also having to compete with increased sales of other entertainment formats such as DVD films and new video game consoles."
Industry analysts are predicting a further 5 per cent decline this year, although some executives have warned the fall could reach 15 per cent if piracy is not addressed.
Downbeat forecasts have already forced several companies - most recently Sony Music - to announce sweeping restructuring and cost-cutting plans. Other groups such as EMI are thought to be seeking a merger with one of the other "majors".
EMI shares were down 2.3 per cent at 94.75p in early trading against a 170p high in January.
Of the world's leading music markets, the US saw album sales fall 10 per cent last year, while Japan was off by 9 per cent.
The IFPI estimated that more than 230m CDs were illegally "burned" in Japan last year, compared with legitimate sales of 229m.
Industry leaders also expressed concern that the UK market reported its first downturn after five years of growth. Intense price pressure pushed the value of UK album sales down by 3 per cent.
The largest decline, however, was seen in Spain where sales fell 16 per cent after the number of pirated CDs on the market reached 24m, or two in every five albums sold.
Only one leading market - France - defied the downturn with a 4 per cent rise in unit sales.
In spite of sliding CD sales, demand for DVD music videos rose sharply; up 58 per cent last year. The IFPI said such videos would become a major contributor to global sales with more than 1,300 new titles released last year.