French lawmakers on Friday watered down their contentious legislation to force Apple Computer to open up its closed system of iPod players and iTunes online music.

But the company still faces the risk of up to $700m fines if it does not comply and the possibility that other governments may be inspired to follow France’s lead.

The law, rushed through after a heated debate on the last day of the session, maintains that all electronic devices should be “interoperable”, so that consumers can play legally downloaded music on any type of digital player. At present, iTunes songs can only be played on Apple technology or burned on to CDs.

The final text, a compromise agreed last week, now gives a new regulatory body powers to impose fines of up to 5 per cent of global turnover on companies that refuse demands to publish the source code to their systems – just under $700m in Apple’s case. But it also opens a loophole that could allow Apple and other companies to use closed systems providing they got permission from the companies that control the rights to the music.

“There is certainly a lot of wiggle room as a result of this,” said Michael Gartenberg at Jupiter Research. However, he said, “at the end of the day, if France insists that Apple is going to have to . . . enable other folks to use their stuff, they’ll probably walk away from the market.”

The loophole could also strengthen the hand of record labels in their negotiations with Apple over royalties for songs sold through the iTunes service.

In May, Apple struck a deal with the fourth biggest record companies to sell songs through iTunes for 99 cents each. The hard-fought agreement represented a defeat for record companies, which had been pushing for a variable pricing model.

”We are the first in the world to do this,” the French culture minister Renaud Donnedieu de Vabres told the national assembly, but other deputies argued amendments to the law had “reduced the right of interoperability to nothing” and opened the way to a “Microsoft monopoly”.

However, Francisco Mingorance, a policy director at the Business Software Alliance whose members include Apple, Microsoft and Dell Computer, said the fining powers were “something really, really drastic that even competition authorities don’t have at the moment”.

Apple has faced increased pressure from European governments this month, with Norway, Denmark and Sweden all saying it must open its closed system or stop operating in their countries.

The news comes a day after Apple shares tumbled 3 per cent on Thursday after the company announced it had uncovered stock option irregularities.

A spokesman from Apple was not available for comment. Apple had previously called the law “state-sponsored piracy”.

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