The 2.5 billion euro ($3.6 billion) online betting industry suffered a setback on Tuesday as the European Union said that a member states could be allowed to ban gambling websites if its intention was to stop crime.

Shares in Austrian online gambling group bwin -- one of Europe's biggest Internet bookmakers which had brought the case before the European Court of Justice -- tumbled as much as 9.5 percent on the news.

Online gaming groups trying to open shop across the 27-country bloc are fighting several European countries in a number of legal challenges over domestic betting monopolies.

It's a bit disappointing because the hope was that the European Commission and the European Court of Justice were actually in favor of markets opening up, said James Hollins, analyst of gambling stocks at Daniel Stewart & Company

It looks like (the ruling) would strengthen the hand of countries who want to continue to protect state monopolies, which include Portugal or Germany, he said.

The European Court of Justice was ruling on a dispute between the Portuguese state betting monopoly, Santa Casa, and bwin and the Portugese soccer league.

Santa Casa had sought to break up a sponsorship deal involving the Portuguese soccer league that allowed bwin to advertise its website to fans.

The court said in ruling: The prohibition imposed on operators such as bwin of offering games of chance via the Internet may be regarded as justified by the objective of combating fraud and crime.

Europe's online gaming market is expected to have a volume of 6.4 billion euros this year, according to consultancy H2 Gambling Capital. Sports betting is the biggest part of this market, with its revenue estimated at 2.5 billion euros.

Bwin said it was unfortunate that the court did not recognize that commercial operators could combat fraud or take measures against addiction as well as state monopolies, and that bans against legitimate operators would only boost a black market.

The reality shows that Internet state monopolies don't work, said Thomas Talos, a lawyer for bwin. We continue to fight for a regulated opening of the market. Bans don't work.

European Lotteries, the EU lobby group representing national lotteries, welcomed the ruling.

This strengthens the hand of national governments and lotteries in controlling what gambling takes place on the Internet, said Rupert Hornig, the group's EU representative.

Bwin and other online gambling companies and associations noted that the scope of the decision was narrow and that the court would still rule on several other gaming cases in the next few months, including disputes in Germany and the Netherlands. ($1=.6950 Euro) (Additional reporting by Boris Groendahl in Vienna; writing by John O'Donnell; editing by Dale Hudson and Karen Foster)

Portugal Germany Gaming