Copyright criminals must face far tougher regulation to protect the entertainment industry, a report says.
The report estimates piracy costs 20% of annual turnover
The Gowers Report was commissioned by the government to look at modernising UK copyright laws for the digital age.
While it proposes new powers against copyright infringement, it also says private users should be allowed to copy music from a CD to their MP3 player.
It also recommends the 50-year copyright protection for recorded music should not be extended.
Former newspaper editor Andrew Gowers said piracy and counterfeiting was probably the biggest challenge the intellectual property (IP) system faced.
The report estimates 20% of the entertainment industry's turnover was lost to illegal copying and says tougher enforcement is a vital part of reform.
It calls for penalties against people who sell pirate versions of music and films on the internet to be brought in line with those who make hard copies. Currently, the former face two years and the latter 10.
The chancellor has welcomed this and announced an extra £5m for Trading Standards officers to take action against more bootleggers.
A hotly-debated aspect of the review was an examination of the copyright on sound recordings.
Many artists and record companies had pressed for the current 50-year limit to be extended to 95 but Mr Gowers has rejected this.
If this is approved it would mean recordings by 1950s artists, notably Sir Cliff Richard, will come out of copyright during the next few years.
But the report recognised the ease of copying material can be useful to the economy and backed a strictly limited private copying exception.
This would mean "format swapping" like putting music from a CD onto an MP3 player - theoretically illegal under present laws - would be allowed.
Mr Gowers says: "The ideal IP system creates incentives for innovation, without unduly limiting access for consumers and follow-on innovators."
The British Phonographic Industry (BPI), which represents the mainstream recording industry, broadly welcomed the report but said it would continue to press for the copyright extension.
Peter Jamieson, chairman of the BPI, said: "Stealing music is effectively stealing the future of British musicians and the people who invest in them.
"The decision on extension is ultimately for the European Commission and we will be putting our case vigorously when it reviews the relevant directive next year."
The Association of Independent Music (AIM) said it was particularly unhappy over the issue of allowing more private copying.
A spokesman said: "This is taking pragmatism to the point of capitulation, and falls drastically short of creating the progressive copyright framework needed in the digital age.
"By tidying up a small part of the copyright law, we believe Gowers may well be opening the floodgates to uncontrolled and unstoppable private copying and sharing from person to person, as well as format to format."
The Federation Against Copyright Theft (Fact) was fully behind the report's conclusions.
Kieron Sharp, Fact director general, commented: "Film piracy has been seen by some as a "soft" crime yet it brings harm and other serious criminal activity to local communities.
"Criminals made over £270m from film piracy in 2005, making this the worst affected single sector for intellectual property crime out of all IP industries.
"This is revenue that has been lost to the local and national economy and is affecting British jobs."
The Alliance Against IP Theft, which represents creative and manufacturing industries, called for an IP minister to oversee the issue.
Director general Susie Winter said: "This is a battle royal against a cunning and adaptable enemy.
"Consumers who buy fake goods will be horrified to discover where their money is actually going.
"The government's response requires all hands on deck, from the police, trading standards officers and the judiciary, to educators, business and the Treasury."
A spokesman for the Treasury said: "We welcome the report and will be carrying its recommendations forward.
"The chancellor specifically highlighted the huge importance of creativity and intellectual skills to the economy."