But new competitors must comply with the rules, which took effect last Thursday, it said.

The rules, announced abruptly last December, appear to be aimed at extending China's Web censorship ahead of the Beijing Olympics and preventing unflattering videos from popping up.

However, analysts said regulators would be reluctant to enforce them strictly and possibly damage a promising industry.

'Companies that began operation legally before the regulation was issued and have not violated laws or regulations can be licensed and continue operating,' said a joint statement from the Ministry of Information Industry and the State Administration of Radio Film and Television.

But services launched later than that 'must comply', it said.

China's video-sharing sites are all privately owned, and the rules could have forced some out of business.

Industry analysts had expected companies to comply by partnering with state-owned broadcasters or newspapers, but no such deals have been announced.

Online video has exploded in popularity in China, which has 210 million people online and is expected to surpass the United States this year in terms of the number of Internet users.

It is estimated to have hundreds of video-sharing sites.

Top sites, such as Tudou.com, 56.com and Youku.com, say they get as many as 100 million viewers a day, a scale that rivals China's state TV channels. Some offer full-length television programmes, but many popular videos are created by amateurs.

Online video revenues, mostly from advertising, are modest, but are growing nearly 100 per cent a year, and investors are pouring money into sites. The Internet Society of China forecasts revenues this year to hit 160 million yuan (S$32 million) - nearly double last year's level.

ASSOCIATED PRESS, AGENCE FRANCE-PRESSE