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Advertisers are suspending ads on YouTube
A recent investigation by the Times found adverts were appearing alongside content from supporters of extremist groups, making them around £6 per 1,000 viewers, as well as making money for the company.
Ministers have summoned Google for talks at the Cabinet Office after imposing a temporary restriction on its own ads - including for military recruitment and blood donation campaigns - appearing on YouTube.
An investigation by The Times found ads for dozens of leading firms have been shown alongside videos posted by extremists including David Duke, former leader of the Klu Klux Klan.
Numerous other racists, holocaust deniers and rape apologists have received payouts from Google for YouTube commercials.
Taxpayer-funded ads for various branches of the British Government were appearing alongside Isis propaganda videos and other offensive content.
Sky, Barclays and Vodafone are understood to be considering whether to cancel their campaigns unless Google is able to resolve the problem rapidly.