Yahoo (NSDQ: YHOO) lost its appeal against a court ruling that its Chinese music website promotes copyright abuse. The site, which offers deep links directly to hundreds of illegal MP3 and other files on third-party web servers, was declared illegal and fined 200,000 yuan ($27,140) in April under new laws introduced in 2006 ; Yahoo appealed, arguing both that search engines should not be held liable for content they index and that it has relevant copyright protections in place. But a court in Beijing threw out the appeal Thursday. Yahoo Inc. owns 40 percent of Yahoo China, a JV with China’s Alibaba.

The International Federation of the Phonographic Industry (IFPI)—the umbrella group that brought the original case on behalf of majors SonyBMG, Universal, EMI and Warner plus their local affiliates—leaped on the ruling, claiming deep-link access services “are a huge drain on efforts to develop a legitimate music market in China,” where 99 percent of all downloaded music is illegal and where 2006 music sales were just $76 million (less than one percent of the world market).

-- The appeal court also upheld a ruling that Baidu (NSDQ: BIDU) had aided third parties in breaking music copyright law. The site is not itself liable because the case was brought under the pre-2006 laws, but the IFPI said the Yahoo ruling should convince Baidu to play by the new rules. Release.

• Yahoo Roundup: Yahoo China Asked To Curb Music Links; Adds Lyrics Service From Gracenote