Undercover officers have helped prevent bomb attacks and seize weapons from extremists but future operations should be approved in advance by high-level authorities outside the police, a report said today.
Tighter controls are needed after Mark Kennedy, who spent seven years posing as long-haired drop-out climber Mark "Flash" Stone, ignored orders, carried on working after being arrested and seems to have believed he was best placed to make decisions about his deployment, inspectors said.
His actions led to the collapse of the case against six protesters accused of planning to invade the second largest power station in the UK.
Sir Denis O'Connor, the Chief Inspector of Constabulary, called for police chiefs to establish a system where prior approval from the Office of Surveillance Commissioners (OSC) would be needed for pre-planned, long-term operations.
Currently, the Home Secretary's approval is needed before a bug can be set up, which may take 15 seconds, but an assistant chief constable can sign off putting an undercover officer in place, sometimes for years, he said.
While there were "only a handful of this kind of undercover deployments active at any one time", operations were not controlled as well as those in other units which used undercover officers to tackle serious criminality.
This may have been because undercover officers in what was the National Public Order Intelligence Unit (NPOIU) were seeking intelligence to stop criminal activity, rather than evidence to be used in courts, inspectors said.
Sir Denis said that while the ability to use undercover officers was "an absolutely essential tactic to protect people", a series of controls should be brought in to test whether a potential deployment is necessary and proportionate.
He called for a clearer distinction between public order policing and tackling domestic extremism, which are now both part of the National Domestic Extremism Unit (NDEU), with extremism being managed under the counter-terrorism network in the future.
Sir Denis also revealed he had referred a matter involving an issue of control within the Metropolitan Police's Special Demonstration Squad (SDS), which was closed down in 2008, to thepolice watchdog after inspectors uncovered documents containing information "we thought could be problematic".
"They may turn out not to be significant," he said.
The review by Her Majesty's Inspectorate of Constabulary (HMIC) was ordered after questions were raised about the proportionality of covert tactics and of such a lengthy and costly operation targeting green campaigners planning to invade Ratcliffe-on-Soar power station near Nottingham.
The case against them collapsed in January last year after they claimed an undercover officer offered to give evidence on their behalf.
Mr Kennedy, who has admitted he had sexual relationships with at least two women during the operation, has since said he fears for his life, describing the world of undercover policing as "grey and murky", adding: "There is some bad stuff going on. Really bad stuff."
But the HMIC report found he worked outside the code of conduct for undercover officers, became "resistant to management intervention", and review and oversight was insufficient.
"He seems to have believed he was best placed to make decisions about how his deployment and the operation should progress," the report said.
Mr Kennedy worked undercover in 11 countries on 40 occasions, mostly on "European-wide protest issues", but there was no single officer in control and the authorising officer was not even always told Mr Kennedy was going overseas, nor given relevant information about what happened while he was there.
His supervisor built up a close relationship with him over seven years and "the degree of challenge and intrusiveness" into his activity "proved insufficient".
Mr Kennedy also defied instructions and went abroad with a protester in 2009 and carried on working against instructions despite being arrested in 2006.
"The full extent of his activity remains unknown," the report said.
Despite uncovering "serious criminality", and helping tackle a group capable of using homemade bombs, there were "insufficient checks and balances" into his actions and "little consideration" was given to an exit plan, the inspectors found.
The Association of Chief Police Officers (Acpo) said it hoped the report's recommendations "can ensure that the public have confidence in the use of these tactics to keep communities safe".
Chief Constable Jon Murphy, the Acpo lead on organised crime, said the review recognised the critical role undercover officers play.
"When used correctly it is lawful, ethical, necessary and proportionate," he said.
"The police service would welcome increased oversight in this critical area of policing."
Ben Stewart, one of the defendants in the Ratcliffe-on-Soar case whose conviction was overturned, said: "Kennedy's controllers have advanced the 'one rogue cop' defence and the authors of this report have happily accepted it."
He went on: "In reality, it's inconceivable that Kennedy's superiors weren't fully aware of the abuses he and other undercover officers were committing in the peaceful protest movement.
"They were only caught out because we exposed them, but there's little in this report that would prevent the same thing happening again.
"We now know some undercover officers were even having kids with activists then walking away, but a report commissioned by the police and conducted by the police has cleared thepolice of serious wrong-doing."
The Independent Police Complaints Commission (IPCC) said the additional issue referred to the watchdog by the HMIC related to "concerns about potential issues of authorisation between 2000-2005 under the Regulation of Investigatory Powers Act".
Moir Stewart, the IPCC's director of investigations, said: "I have been in contact with the MPS (Metropolitan Police Service) and asked them to consider whether the matters raised by HMIC are referable.
"The MPS are carrying out a wider review into the activities of undercover officers and they have agreed that, should any recordable conduct or possible criminality involving other officers come to light as a result of this review, it will be referred to the IPCC."
Responding to the report, Yvette Cooper, shadow home secretary, said: "It is clear from this report that serious reform is needed to the oversight of undercover policing to put proper checks and balances are in place.
"Undercover tactics are required to investigate and prevent some very serious crimes. But there must be strong safeguards too, to make sure they are used proportionately with a much higher level of authorisation and oversight, and are not abused.
"Undercover deployments must meet the highest standards to protect the integrity of our police and provide the level of accountability the public expects.
"It is clear from this report that whilst vital intelligence and policing work protecting the public has been delivered through successful undercover work, some operations have gone badly wrong, damaging trust. The HMIC are right to argue that reforms are now needed to prevent this happening again."