Traders said the markets were taken by surprise when Congress rushed through the 'Unlawful Internet Gambling Enforcement Act' on Saturday.

The bill prohibits banks and credit card firms from processing Internet gambling payments from customers in the United States.

Shares in British firm PartyGaming -- the world's biggest online gambling company -- were down 55 per cent in afternoon trading in London Monday as a result of the legislation.

Canadian software firm Cryptologic, which announced last week it will move its head office from Toronto to Dublin, also saw its shares slump Monday during morning trading on the Toronto Stock Exchange.

Cryptologic builds the software behind gambling sites, but is also involved in taking wages through its subsidiary WagerLogic.

"Our decision to stop taking wagers on behalf of our licensees who have customers in the United States fully supports a policy that we put in place five years ago which was to migrate our business to European and world markets and move away from the uncertainty of the United States," said Stephen Taylor, chief financial officer of Cryptologic.

Other Canadian companies involved in the industry found their stock similarly stricken by the news, including Las Vegas From Home.com and Internet Bingo firm Parlay Entertainment Inc.

Meanwhile, Britain's Sportingbet, which does more than 60 per cent of its business in the U.S., said it called off takeover talks with World Gaming, while shares in rival 888 Holdings tumbled by more than 30 per cent.

"This legislation indicates Congressional intent to treat Internet gambling, whether sports-related or not, as illegal," 888 Holdings said in a statement.

Several firms have said they will stop taking bets from U.S. customers if the bill is signed into law by U.S. President George Bush in the next two weeks.

Hardest hit companies

The companies hit hardest by the ruling are those that offer betting markets denominated in U.S. dollars, and usually operate from bases in the Caribbean or Central America.

Most of the big British and Irish sites, by contrast, keep their operations in Europe and take deposits only off credit cards denominated in pounds and euros.

The legislation, if enacted, "will make it practically impossible to provide U.S. residents with access to its real money poker and other real money gaming sites," PartyGaming said.

The legislation -- part of a sustained clampdown on online gambling in the U.S. -- was attached to an unrelated bill aimed at improving port securities.

The bill was passed by both the House and Senate on Saturday morning.

Hailing the new legislation, Senate Majority Leader Bill Frist told reporters that gambling was "a serious addiction that undermines the family, dashes dreams, and frays the fabric of society."

House Majority Leader John Boehner said the new law was a key advance for the Republicans' "American Values Agenda" ahead of the mid-term election.

Canadian addiction researchers say that while online gambling makes up a small minority of all gambling activity, it tends to attract the Internet-savvy generation.

"It's more popular among the younger age groups," said researcher Jamie Wiebe. "In a recent study, we found that the 18-24-year-old group was most likely to engage in that form of activity. They also had the highest rates of gambling problems."

Canada's federal government is monitoring the issue, but plans to focus on prevention and treatment for gambling addicts.

"Our approach, which is to deal with people who have these issues -- I think it's probably the more appropriate one and probably the one that'll have more success," Health Minister Tony Clement said.

Arrests

The move follows the arrests in the U.S. this year of the bosses of two foreign online companies over alleged illegal Internet gambling.

The U.S. Department of Justice claims online gambling violates the 1961 Wire Act -- legislation that was aimed at fighting organized crime.

The legislation outlaws the use of phone lines to place bets across state lines.

"This has come as a major shock to the industry, where most observers expected the legislation to fail," Stephen Ford, an analyst for British broker firm Collins Stewart, told the Associated Press.

Some analysts insisted they were remaining upbeat about the gambling sector, which generated around US$15 billion globally.

And others argue that such gambling is here to stay.

"Prohibition just doesn't work. The U.S. has tried it in the 1920s with alcohol. It just doesn't work. The demand for online gambling product is just not going to go away," said Keith Furlong of the U.S. Interactive Gaming Council, an online gambling lobby group.

With a report from CTV's David Akin and files from The Associated Press