The surprise settlement permanently bans Grokster from participating, directly or indirectly, in the theft of copyrighted files and requires the company to stop giving away its software, according to court papers.

Executives indicated plans to launch a legal, fee-based "Grokster 3G" service before year's end under a new parent company, believed to be Mashboxx of Virginia Beach, Va. Mashboxx, headed in part by former Grokster president Wayne Rosso, already has signed a licensing agreement with Sony BMG Music Entertainment.

"It is time for a new beginning," Grokster said in a statement issued from its corporate headquarters in the West Indies.

Grokster's Web site was changed Monday to say its existing file-sharing service was illegal and no longer available. "There are legal services for downloading music and movies," the message said. "This service is not one of them."

The head of the Recording Industry Association of America, Mitch Bainwol, described the settlement as "a chapter that ends on a high note for the recording industry, the tech community and music fans and consumers everywhere."

It was unclear whether Grokster can afford to pay the $50 million in damages required under the agreement. The head of the Motion Picture Association of America, Dan Glickman, said the entertainment industry will demand full payment unless Grokster satisfies all its obligations under the settlement.

Grokster's brand will survive. The new fee-based version of its software will be available within 60 days, according to one executive involved in the deal. This executive spoke only on condition of anonymity because the sale of Grokster's assets is pending.

Grokster's decision was not expected to affect Internet users who already run the company's file-sharing software to download music and movies online, nor was it expected to affect users of rival downloading services, such as eDonkey, Kazaa, BitTorrent and others.

Glickman said Grokster will send anti-piracy messages to existing users, and the company is forbidden from maintaining its software or network. "Without those services, the system will degrade over time," Glickman said.

Grokster lost an important Supreme Court ruling in June. Justices ruled that the entertainment industry can file piracy lawsuits against technology companies caught encouraging customers to steal music and movies over the Internet.

The decision, which gave a green light for the federal case to advance in Los Angeles, significantly weakened lawsuit protections for companies that had blamed illegal behavior on their own customers rather than the technology that made such behavior possible.

The court said Grokster and another firm, Streamcast Networks Inc., can be sued because they deliberately encouraged customers to download copyrighted files illegally so they could build a larger audience and sell more advertising. Writing for the court, Justice David H. Souter said the companies' "unlawful objective is unmistakable."

"They're out of business," said Charles Baker, a lawyer for Streamcast. "It's over for them. There was a lack of desire to continue to fight this thing going forward." Baker said the settlement does not affect Streamcast, the co-defendant in the entertainment industry's lawsuit.

The Supreme Court noted as evidence of bad conduct that Grokster and Streamcast made no effort to block illegal downloads, which the companies maintained wasn't possible.