The tiny South Pacific island state of Tuvalu, where the average income is little more than £12 a week, has taken on one of the giants of cyberspace by demanding a greater share of the lucrative earnings generated by its unique domain name suffix.

When Tuvalu was awarded ".tv" by the International Organisation for Standardisation in 1999, global internet providers queued up to do business with the former British protectorate, which used to be part of the Gilbert and Ellice Islands. At least five internet companies flew to the remote capital of Funafuti to tender for the right to lease the initials TV so that it could be used by television and media organisations around the world. Eventually a deal was struck with a Californian company which offered an advance payment of $50m (£33m) – more than half Tuvalu's annual GDP at the time – with many more millions to follow.

Hopes for the value of the suffix proved well founded. Television networks such as Britain's GM.tv, football clubs such as Liverpoolfc.tv and celebrity websites such as Hollywood.tv paid big money for a web address with the coveted suffix. But this rich and glossy corner of cyberspace, where media companies continue to pay many thousands of pounds to put .tv after their names, has little in common with the harsh reality of Tuvalu itself. Beset by environmental contamination, high unemployment and rising ocean levels, Tuvalu and its 11,000 people face an uncertain future.

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Covering just 10 square miles, the main island, which has no streams or rivers, produces little in the way of crops and relies on processed food from Western nations to feed its people. For some years, Tuvalu and other Pacific islands have been used as a dumping ground for cheap and fatty cuts of meat by larger countries such as New Zealand. The poor diet has created major health problems, with heart disease and diabetes killing people in their thirties and forties.

More than 3,000 miles from its nearest First World neighbours, New Zealand and Australia, Tuvalu is also one of the world's most isolated societies. Western packaging and machinery are difficult to dispose of, leaving much of the main island with a major rubbish problem. Old cars litter the beach and massive holes excavated by the Americans to build a runway during the Second World War add to its mounting environmental woes.

Tuvalu also finds itself on the frontline of climate change. In recent years many coastal homes have been swamped by rising ocean levels which have eroded the coast and added to the salination of the soil which in turn threatens the community's subsistence farming. Given that the highest point on Tuvalu is only 16 feet above sea level, the risk of the archipelago of nine islands being swamped is high.

The Prime Minister, Apisai Ielemia, who refused to sign a proposal at last year's Copenhagen talks that supported a two-degree cap on global temperature rises, believes such a limit would spell disaster for his nation. According to the government's environmental director, Mataio Tekinene, the facts speak for themselves, with the increased frequency of hurricanes and storm surges clearly illustrating the long-term impact of climate change.

Beside this bleak environmental scenario, Tuvalu faces profound economic problems. A trust fund set up in l987 with contributions from several Western nations, including its old colonial master, Britain, has been hit by the global financial crisis over the past two years. The International Monetary Fund recently gave Tuvalu £1.6m, but the government has annual outgoings of more than £18m and a 2010 budget deficit of £5.7m.

The Minister of Finance, Lotoala Metia, says they can probably survive for a couple more years, but after that the money will run out. That is why that internet suffix is so crucial to their survival. However, despite all the early promises of lucrative annual payments for the lease, Tuvalu earns about £1m a year in royalties from the US company Verisign, which markets and sells ".tv" to website owners. That is roughly a 10th of the government's total revenue and, according to Mr Metia, it is not enough. The payment should be nearer £5m a year, given the amount of business the domain suffix is earning in royalties, he said.

According to the thedomains-dot-com blog, Verisign recently auctioned the name business.tv for more than $100,000 and Learn.tv for $40,000. In all, more than 100 names were sold in the auction. "We are not getting what we should be getting. Other companies have offered us very attractive packages," Mr Metia claims.

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The problem is that the contract has another six years to run. The Finance Minister says Verisign has offered another £500,000 a year, but only if Tuvalu extends the contact for another five years.

Mr Metia believes that is not enough. "It is an important issue, but we have an agreement which we will have to honour," he says.

While it is easy to sympathise with Tuvalu's position, others within the internet industry do not share Mr Metia's sense that the islanders are being exploited.

Adrian Kinderis, who provides a similar domain service for Australians seeking the ".au" suffix, believes Tuvalu has a pretty good deal. "I don't know how much Verisign are making, but you must take into account how much money they've spent on marketing this and how much it costs to run the registry," he says.

Mr Kinderis, the chief executive of Ausregistry International, adds: "It's easy to look at this as a sort of David and Goliath situation, but I believe Tuvalu should not look a gift horse in the mouth."

Verisign refused to be drawn on Tuvalu's demand for more money. In a statement, the company said: "Verisign is very proud of its long-standing relationship with the government of Tuvalu, but it is not in a position to comment any further around ongoing business or financial discussions with said government in relation to '.tv'."

How long the stand-off between this giant of cyberspace and the South Pacific minnow continues may depend on how the market for domain names develops. With plans for more commercially driven suffixes such as .movie, .film and even .television just around the corner, Tuvalu could soon face tough competition in cyberspace.

"Let's not forget that the advent of these new, generic, top-level domains is not far away," Mr Kinderis says. "You will see the value of '.tv' diminishing, which could mean Tuvalu saying, 'Well, Jeez, we actually did pretty well out of that, when all's said and done.'"

Such an eventuality would bring even greater financial hardship on the island state. Apart from copra, or dried coconut kernel, Tuvalu has few exports. The government makes money from the sale of tuna fishing licences and by selling its postage stamps to philatelists.

There was a time when Tuvalu enjoyed a significant revenue boost from telephone sex lines, which were routed through the country's international access code, 688. But the contract was cancelled in 2000 because of the devoutly Christian population's disapproval of the arrangement.

The ultimate concern is that islanders will have to leave their little corner of the South Pacific if the money runs out.

Mr Metia describes it as a "very, very difficult situation". "The challenge that we're facing at the moment is that unless we get assistance from donors we will not be able to progress any further."

It is not an issue of immediate concern to the glittering world of television and the multimedia websites that spend big money for the privilege of using the ".tv" suffix. But back on Tuvalu, it is of critical importance to those who are no longer masters of their own domain.