Town halls that wrongly ban events on health and safety grounds could face making big compensation payouts, under plans being considered by the Government.
Teachers could also be given assurances that they are not liable for everyday mishaps and accidents during school trips and after-hours clubs.
Tory former Cabinet minister Lord Young, who has drawn up the proposals at David Cameron's request, said he wanted to inject "common sense" into the health and safety regime.
But critics accused the peer of focusing on "silly" incidents rather than ensuring people were properly protected at work and in the community.
Lord Young's review has concluded that:
:: Local authorities that wrongly try to block events on health and safety grounds should be forced to pay compensation;
:: There should be a crackdown on advertising encouraging people to make personal injury claims on a no-win, no-fee basis;
:: Red tape that can prevent children from going on school outings should be scrapped;
:: People performing first aid or Good Samaritan acts should be exempted from being sued.
Speaking to the Daily Mail ahead of a speech to the Tory conference in Birmingham, Lord Young said he had uncovered extraordinary examples, including a restaurant that would not give out toothpicks for fear of injury, a headteacher who told pupils not to walk under a conker tree without helmets and a council that banned a pancake race because it was raining.
"It makes you wonder what sort of world we have come to," Lord Young said.
"It has gone to such extremes. What I have seen everywhere is a complete lack of common sense. People have been living in an alternative universe."
Lord Young said he was particularly concerned about council officials who often claimed powers to stop village fetes, sporting events or other events when they have none.
In one example, organisers of the annual Whitsun cheese-rolling down a steep hill in the Cotswolds cancelled it this year after pressure from police and local authorities.
In future those affected by wrong decisions may go to the local government ombudsman who will be able to insist that a council pays compensation.
Asked how much local authorities would be forced to pay, Lord Young said: "Whatever the loss is. I want officials to think twice and make sure they have the authority.
"This sort of nonsense has come from the last government trying to create a nanny state and trying to keep everybody in cotton wool.
"Frankly if I want to do something stupid and break my leg or neck, that's up to me. I don't need a council to tell me not to be an idiot. I can be an idiot all by myself."
Lord Young went on: 'Schools are not allowing pupils to go on days out because they are scared they will be liable if an accident happens.
"That's nonsense, and that's not going to continue, unless a teacher is really negligent. In the ordinary course of events, accidents happen."
Lord Young said the Government had approved his report, which is due to be published later this month, and would also implement a crackdown on 'ambulance-chasing' personal injury firms.
There will be restrictions on the way they advertise their services and a limit to speculative lawsuits.
TUC Health and Safety Officer Hugh Robertson said: "The signs are that Lord Young's report gets the balance completely wrong.
"For sure silly things are sometimes done in the name of health and safety and the behaviour of some claims firms can be reprehensible.
"But the real health and safety scandal in the UK is the 20,000 people who die each year due to injury or diseases linked to their work.
"A serious review of health and safety would put far more emphasis on dealing with this avoidable death and suffering.
"Losing a loved one to an occupational disease is rather more serious than losing out on the chance to join a pancake race."
Des Collins, senior partner of Collins Solicitors, attacked the review for offering a "quick fix".
"The perception is that we live in a compensation culture and if you stop people suing, that compensation culture will simply disappear," he said.
"Once you start restricting the right of the individual to go to court to complain then you are, in my view, heading for trouble."
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