The competition prompted entrants to use Microsoft's Live Search on MSN to find the images and drag and drop them into an entry box for the chance of winning a Nikon camera.
The website was developed for Microsoft by Thin Martian.
Photographers complained because, while search engines' use of thumbnail images is considered fair use if they fulfil certain criteria, such as linking back to the original page where the image was taken, the search engine for the competition did not provide link backs or attribution.
The competition was originally sponsored by Nikon with judges Simon Coleman from Nikon Imaging, Mike Selby from Rex Features and actors Joanna Lumley and Brian Blessed.
Following the complaints Coleman has withdrawn as a judge and Nikon said in a statement: "Nikon would like to confirm that it has withdrawn its support from Microsoft's Iconic Britain competition. This is due to feedback and concerns raised by photographers and entrants surrounding the competition mechanic that was developed and promoted by Microsoft.
"Nikon will fulfil its prize commitment to the winners, however it will not be associated with the competition going forward."
Stephen Macken, a freelance photographer, said that thousands of photographers have complained about the competition and that a number of groups were discussing it on photo sharing site , with up to 100 posts per group.
Microsoft compounded its error by issuing an initial statement to Pro Imaging, the international web based group of independent professional photographers, claiming that "all images that feature on are images from the internet and therefore in the public domain".
This infuriated photographers further because the internet does not mean the public domain.
Microsoft said in a later statement to Pro Imaging: "It is always important to Microsoft that we respect the intellectual property rights of others, and we regret that this specific marketing program fell short of our very high standards."
It added that it has since taken steps to obtain the rights to use every image to be featured in the subsequent stages of the competition.
The entry deadline for the competition was July 31 and Microsoft will reveal the final 100 images on August 14.