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GCHQ files leaked by former NSA contractor Edward Snowden reportedly revealed how the Optic Nerve programme collected still images of webcam chats regardless of whether individual users were suspects or not.
In one six-month period in 2008, the British spy agency collected webcam imagery from more than 1.8 million Yahoo user accounts around the world, the Guardian said.
Yahoo, which was apparently chosen because its webcam system was known to be used by GCHQ targets, expressed outrage at the reported surveillance.
"We were not aware of nor would we condone this reported activity," a spokeswoman for the US technology firm told AFP in an email statement.
"This report, if true, represents a whole new level of violation of our users' privacy that is completely unacceptable.