In a 14-page report, the FTC acknowledged that the online industry's efforts are not widespread, and some Web sites "still do not understand the importance of consumer privacy."
But with a 3-1 endorsement, commissioners decided that new federal privacy laws are "not appropriate at this time" for the Internet.
"That is not to say all that needs to be done has been done," FTC Chairman Robert Pitofsky said in testimony before the House Commerce Committee's telecommunications panel. "If progress does not continue at something like the pace we've seen so far, then I think it's time to reconsider the legislative solution."
Commissioner Orson Swindle suggested it would be impossible for government to enforce privacy promises that U.S. companies make on Internet sites that number in the millions.
"Try to imagine how the FTC would enforce this," Swindle told lawmakers. "Then we must punish. That represents a heck of a dilemma."
In her partial dissent, Commissioner Sheila F. Anthony said Congress should consider setting minimums for protecting personal details that consumers might disclose online.
"Progress has been far too slow," Anthony said. She warned that if Congress doesn't pass privacy laws, Americans won't be satisfied and a "patchwork of state laws will emerge."
"Consider the confusing online environment that could emerge," she said.
The recommendation from the FTC, which has taken a lead role helping formulate U.S. policy toward the Internet, was a victory for online companies. The industry feared mandatory privacy rules that could raise its costs even in these earliest stages of electronic commerce.
"Now is not the time to intervene in the marketplace," said Christine Varney of the Online Privacy Alliance, an industry trade group. "There's been a real validation here that if you give the market a chance to work, it will."
The White House failed to meet a self-imposed deadline this summer for negotiating with the European Union about how new international privacy laws might affect U.S. businesses online. European Union First Secretary Gerard De Graaf said the FTC report probably wouldn't affect those continuing talks, but he said Europeans wanted Congress to pass privacy laws too.
"Clearly our preference is one of legislation, at least in some important areas," De Graaf said.
The FTC's decision clearly was influenced by an industry-funded study this spring showing dramatic improvement since last year in the number of companies that tell consumers how personal information collected about them on Web sites is used.
The study found that nearltwo-thirds of commercial Internet sites displayed some warning that businesses were collecting personal details from visitors, such as names, postal and e-mail addresses and even likes and dislikes. A similar study in 1998 found only 14 percent did.
"That's really remarkable progress, and the industry deserves a lot of credit," Pitofsky said. "Having said that, that doesn't mean they're anywhere near the goal line. There's a lot more to be done."
Privacy groups complained bitterly that the government was abandoning consumers to corporate America.
"Why is the FTC being so indulgently lenient?" asked Jason Catlett of Junkbusters Corp., a New Jersey-based privacy group. "It is extremely disappointing that the FTC found fair information practices not widespread, yet failed to recommend that they be imposed on an industry that is obviously never going to go much further than they're forced to."