* Legal digital music sales grew 12 percent in 2009
* Overall sales down around 10 percent
* Spain hit hard by piracy, Japan also affected
LONDON, Jan 21 (Reuters) - Global recorded music sales fell around 10 percent in 2009 and are down 30 percent since 2004 as rampant illegal downloading eats into legitimate digital and physical sales, the industry's trade body said on Thursday.
The IFPI said in its annual report the industry had seen positive developments in 2009, with more than a quarter of all recorded music revenues now coming from digital sales after the industry embraced new ways to sell tracks.
However, the rate of growth has slowed in recent years, and sales from the likes of Apple's (AAPL.O) iTunes and Spotify failed to counter the damage wrought by illegal downloading.
"We've had yet another year of new services coming to the market, great innovation, growth in our digital business," IFPI Chairman and Chief Executive John Kennedy told Reuters in an interview. "But at the same time the problems that we're facing with piracy have certainly not gone away.
"We have always hoped the day will come that the increase in our digital business will make up for the fall in our physical business and that's certainly not happening yet."
The report showed legal digital sales grew by an estimated 12 percent in the year to $4.2 billion, compared to the 25 percent growth recorded in 2008 and 30 percent growth in 2007.
Overall recorded music sales were estimated to be down around 10 percent compared with a fall of around 7 percent in 2008 and an 8 percent fall in 2007.
The IFPI estimates that around 95 percent of the music downloaded in 2009 was illegal and not paid for.
The IFPI said the worst-affected markets were countries where legitimate digital services had yet to take off. Sales fell around 17 percent in 2009 in Spain for instance, and the market is now about a third of its 2001 level.
"In Spain, a culture of state-tolerated apathy towards illegal file-sharing has contributed to a dramatic slump in the music market," the report said.
The IFPI said this approach had resulted in a drop off in investment in local language artists, who then struggled to feature in the album charts.
Japan, traditionally a strong market for digital sales, reported flat digital revenues in the first half of 2009, with CD sales falling more than 20 percent, due to mobile piracy and the economic downturn.
The report said the global legitimate digital market had been boosted by an array of new offerings, including subscription services on mobile phones and via Internet service providers, download offerings and advertising-funded models such as music-streaming service Spotify.
In total, more than 400 licensed music services are now available around the world, offering 11 million tracks.
Sales of music downloads, the dominant revenue stream within digital music, continued to see steady growth, with single track downloads up by around 10 percent on 2008 and digital albums up by around 20 percent.
Free, advertising-funded services have also shown signs of attracting users who had previously used illegal sites and music executives noted these services could grow very quickly.
Rob Wells, the senior vice president of digital at Universal Music Group International, told Reuters Spotify had become its fourth biggest international digital partner by revenue in one year.
He said a service from Nokia (NOK1V.HE), which supplies music with the price included in the charge for the handset or phone subscription, had also done well in developing markets and underperformed in more developed markets. The service was launched with much hype in 2008 but had not appeared to sell very well. (Reporting by Kate Holton; editing by Will Waterman and Karen Foster)