It remains unclear whether the European industry's victory will have any effect in the United States, however, where some of the fiercest copyright battles are being played out.
"The issue has arisen to some attention here in the U.S., and eventually the problem will have to be worked out between the sites and the music industry," said Chris Charron, an analyst at Forrester Research based in Cambridge, Mass.
The entertainment industry has long battled new technologies that make it easy to bootleg digital music and movie files on the Net. Driven by fears of losing control over their content, many recording studios have filed copyright actions against portals, software companies and other Web businesses that allow unauthorized copying.
But a recent study by Forrester found that while piracy exits, it doesn't appear to be prevalent.
In a report due for release soon, Charron said researchers learned that about 5 percent of the people using the Internet have some pirated material in their hard drives. Of that group, about 16 percent own more than 50 such files.
"It's definitely an issue for the music industry," Charron said, "but it's not as widespread as some people say it is."
Still, Gema, Germany's main music licensing group, told wire services that today's verdict in Europe is a signal that Internet services need to introduce new technologies to protect copyrights.
The case in Germany began in 1998 after a German company called Hit Box sued AOL after learning that people were downloading digital instrumental versions of pop hits for free using AOL's service.
Hit Box's digital recordings were intended for use as karaoke tracks, which normally cost about $15 on a CD, the company told The Associated Press.
The company sought $50,000 in damages, but judges put off a ruling on the size of the award. In the meantime, AOL confirmed that it will appeal the decision.
While music groups in Germany were hailing the decision as a major victory for protecting copyrights online, companies in the United States appeared reluctant to join the party.
A spokesman for the Recording Industry Association of America said he had not heard of the ruling and doubted his organization would comment.
The association is in the midst of a closely watched copyright battle with music start-up Napster.
Napster is a service charged with facilitating piracy by allowing music enthusiasts to swap digital recordings, called MP3s. The case is moving along in a San Francisco federal court.
Meanwhile, other programs based on the popular Napster have begun cropping up around the Web.
But before AOL's action, the software was leaked, and programmers quickly began developing and distributing Gnutella "clones," causing major headaches for the recording industry.
The Associated Press contributed to this report.