Ministers are now finalising controversial proposals to change the law to give enforcement and spying organisations the right to hack into e-mails and access scrambled documents.
The Downing Street policy unit, and an inter-departmental group of officials, including representatives of MI5 and MI6, is working on the plans, which are expected to be included in the E-Commerce Bill announced in the last Queen's Speech.
The proposed legislation has led to a Whitehall row between the Home Office, which wants more regulation of the internet, and the Department of Trade and Industry, which fears it would undermine its attempts to present Britain as the technological heart of Europe. It has also angered civil liberties campaigners, who believe it is further evidence of state intrusion into the lives of individual citizens.
There is virtually no regulation of the internet, which links millions of people across the globe. Until now, it has been difficult for the police or security services to intercept information on the internet. Phone- taps and search warrants were not designed with the international network in mind.
Computer users have begun to "encrypt" their messages. Criminals use this method to hide illegal activity - but so do businesses to carry out secure transactions. The row is focusing on whether or not the enforcement agencies should be be able to demand the "keys" which unscramble the encrypted data.
Jack Straw, the Home Secretary, believes that the security services should play a bigger role in clamping down on criminal activity on the internet and will need new powers to carry out these duties.
However, the DTI does not want the police and security services to be allowed to "snoop" on internet users. Ministers argue that it would discourage people from using the internet for business.
Civil liberties campaigners are also opposed. Liz Parratt, campaigns manager for Liberty, said: "It is vitally important that the police are not given the powers to do the electronic equivalent of steaming open your mail whenever they like after you have posted it."
An unpublished draft of the E-Commerce White Paper proposed a voluntary system in which third parties would hold the "keys" confidentially, but could be approached by the police or security services in specific cases.
However, this has now been torn up and sent back to the drawing board.Reuse content