The memorandum of understanding was signed between music and film rights-holders, six internet service providers (ISPs) and the UK government last week.
It will see ISPs work together with the music industry to tackle illegal downloading with the help of a three-strike plan.
The parties signed the agreement and also launched a consultation process which will set forth views on a proposal that will involve a self-regulatory approach.
This takes forward Recommendation 39 of the 2006 Gowers Review of Intellectual Property, which addressed the issue of illicit use of peer-to-peer file sharing.
The aim of the deal is to engage and educate users about unlawful file sharing, and make material legally available online in a wide range of user-friendly formats.
The exact details of the plan will be agreed after the consultation process is completed which should be sometime in October this year.
Under the plan, the ISPs will send letters to users who unlawfully share copyrighted material. The letters could point consumers to other sources of material available legally and in a variety of formats.
ISPs and rights holders will also produce a code of practice on how they will deal with alleged repeat infringers. This code is still being drafted.
After the letters have been distributed, if the user still ignores the warnings then his account will be suspended. One of the ideas that is being discussed is to reduce bandwidth speeds for repeat infringers.
The six ISPs that have signed the memorandum are Virgin Media, Sky, Carphone Warehouse, BT, Orange and Tiscali.
A partner from a UK firm which represents both record companies and ISPs said that the process is still unclear and it is only in the next few months that the specific details will be known.
"Here the focus in on uploaders and not on downloaders which enlists a three-strike plan to tackle internet piracy. The three-strike plan doesn't say that the ISPs will terminate the user's account. ISPs are wary of terminating user accounts as they will lose customer revenue, and they wouldn't want that," he told Managing IP.
He also said that the ISPs are more in favour of creating self-regulatory measures than legislative changes. "This is almost a last-chance saloon plan for them," he added.
John Linneker of Denton Wilde Sapte said it was "a bold and risky step" for ISPs "to agree to write warning letters to their own customers threatening to unplug their internet access".
"There are some very obvious practical problems in this sort of strategy. For example, it seems unfair to penalise a household by removing internet access because the babysitter did a bit of file sharing while the parents were out having dinner," said Linneker.
However, the government and music industry representatives said the consultation is a positive development and a big step forward.
Secretary of state for business, John Hutton, said: "This is an intelligent approach to tackling unlawful file sharing by industry and ISPs. It tells consumers what they can do, rather than just what they can't.
This is also the first time in the UK that the ISPs have agreed to work with the music industry and recognize their responsibility to help deal with illegal file sharing.
John Kennedy, CEO of the International Federation of the Phonographic Industry said: "The UK agreement is a big step towards reaching a solution to online piracy, and it shows that the process of engaging ISPs that was set in motion in France last year is gathering real momentum internationally. It is important that it now drives the process forward to a solution with urgency, and that it achieves concrete, measurable results."
In February this year, the UK government threatened to introduce laws to force ISPs to take action against illegal file-sharing, just a few months after the French government had revealed efforts to approach the ISPs to fight internet piracy.
