UPDATE:

Instagram issued a statement this afternoon following a huge public outcry over its policy changes.

The statement was in part a mea culpa, as Instagram co-founder Kevin Systrom admitted that the company made mistakes with the language of the new terms. 

"Since making these changes, we’ve heard loud and clear that many users are confused and upset about what the changes mean," Systrom wrote.

However, Systrom pointed out that some of the confusion over the new terms was due to incorrect interpretation of the terms.

"Instagram users own their photos," Systrom wrote. "Instagram does not claim any ownership rights over your photos. Nothing about this has changed."

Systrom praised the user community for its quick feedback.

"I am grateful to everyone for their feedback and that we have a community that cares so much. We need to be clear about changes we make — this is our responsibility to you," he wrote.

Read Instagram's full statement on the backlash here. 

Earlier story:

Users of the photo-filtering and -sharing site Instagram are facing a decision to either delete their accounts or allow Instagram to sell their photos.

According to a CNET article, this policy change gives Instagram the right to take photos posted by users to the site and sell them to anyone, without asking the user for permission or compensating them for the use of the picture.

The Terms of Service says:

Some or all of the Service may be supported by advertising revenue. To help us deliver interesting paid or sponsored content or promotions, you agree that a business or other entity may pay us to display your username, likeness, photos (along with any associated metadata), and/or actions you take, in connection with paid or sponsored content or promotions, without any compensation to you.

The article uses the example of vacation photos to illustrate.

Let's say you go to a hotel in Hawaii on vacation, and while you're there you Instagram photos of yourself lounging by the pool, having dinner in the hotel restaurant or drinks at the bar. The hotel could purchase your pictures from Instagram and use them in their advertising without your input.

The only way to opt out of the new terms is to delete your Instagram account. There are services such as Instaport (recommended by Wired magazine) that will let you download your Instagram photos into a ZIP file. 

If you choose to close your Instagram account, you must do so by Jan. 16, 2013. Any accounts still open on that date will automatically fall under the new terms of service, even if you delete your account after that date.