Online music service Napster on Tuesday launched its first MP3 music store, free of restrictive digital rights management protection and free to compete head-to-head with Apple’s iTunes.

Napster is only the second MP3 music store to offer storewide DRM-free tracks. Amazon was the first to talk the major labels out of their wildly unpopular insistence on DRM restrictions. (see Amazon, Warner Rock MP3s)

Los Angeles-based Napster sees its adoption of the DRM-free MP3 distribution format as a very good opportunity to put a dent in Apple’s long-running digital music market domination.

“In the past Napster has always been excluded from the iPod segment of the market because our products did not operate on the iPod,” said Christopher Allen, Napster’s chief operating officer.

With its MP3 store Napster’s music can now play on the iPod and the price to download a single track is at what is practically the industry standard of $0.99, and albums start at $9.95.

“We expect a massive migration of iTunes users to Napster, which will not only work on their iPods but on almost any other music device or phone they may have,” Mr. Allen said.

But Forrester Research analyst James McQuivey believes that iTunes will not be severely hurt in the short run by the DRM-free trend in part because ultimately all of the major music stores will have it.

“Apple is more concerned with Nokia making inroads with its cell phones than it is concerned that Napster will sell the same MP3 tracks that can be had everywhere else,” he said.

But Mr. Allen believes that unlike Apple and Amazon, Napster has major differentiators in the fact that it is focused almost entirely on music, has a long history and offers the consumer more options.

“We are a one-stop shop for everything from the major labels to thousands of independent labels,” Mr. Allen said. “Napster has been aggregating its catalog of six million tracks for four and a half years and that is not something easily replicated overnight.”

Napster currently has about 750,000 subscribers.

A recent survey from Forrester Research suggests that digital music downloads will surpass CD sales by 2012 and reach $4.8 billion in sales. (see Digital Music Finding its Sales Groove)

According to the survey, the fact that the music industry is dumping DRM means that MP3 players, which have been underutilized because of DRM, will play a central role in reshaping the economics of the industry.