The site will add £2 to the cost of a CD delivered to the UK or Ireland

The British Phonographic Industry (BPI) and CD-Wow! were due to have gone to court in two weeks' time.

CD-Wow! had been accused of violating UK copyright law by importing cheaper CDs from outside Europe to the UK.

The retailer says it will now raise UK CD prices by £2 as it will have to buy more expensive CDs from Europe.

"I am delighted that we have been able to resolve this case on agreed terms," BPI chairman Peter Jamieson said.

The BPI and CD-Wow! released a joint statement after the settlement was reached.

'European only'

"The record industry claimed that CD Wow! was obtaining sound recordings from outside Europe and selling them to UK and Irish consumers," the statement said.

"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," it said.

The BPI says selling CDs bought from outside Europe violates UK law

CD-Wow! currently charges £8.99 for a CD in the Top 75 albums chart, but will now have to add a £2 surcharge to any CDs delivered in the UK or Ireland from this Sunday, director Philip Robinson told BBC News Online.

The BPI would not comment on the impact the settlement would have on UK consumers who had been using CD-Wow!.

He said the company had decided to settle because they were "a small business" and it would be financially "imprudent" for them to try and take the case to the Court of Appeal or the European Court.

Mr Robinson also said all of CD-Wow!'s products had been brought from record companies around the world, and did not include pirated material.

"We got our CDs from wherever we could, but they were always record company product and legitimate. There was never any question of piracy," he said.

CD-Wow! has more than one million users a month worldwide.

The BPI is also investigating online retailer Amazon to see whether it is importing CDs from outside Europe.