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A voluntary code of practice, awaiting approval from Parliament, asks phone companies and ISPs to keep records of their customers' activities for up to 12 months so that they can be accessed by law enforcement agencies and government bodies.
But concerns about the compatibility of the data retention scheme with data protection laws have prompted ISP lobby group the Internet Service Providers Association to recommend that its members do not sign-up to the data retention code.
The London Internet Exchange (Linx), which represents the largest UK internet service providers, said ISPs would find it technically difficult to separate the data required by government agencies from other data that would breach data protection laws if stored.
Malcolm Hutty, technical director of Linx, said, "One of the dangers of the voluntary code is that it may put ISPs under pressure to take short cuts with the Data Protection Act, given that the additional processing is going to be difficult and expensive to do."
Data watchdog the Office of the Information Commissioner said it had concerns about the code of practice. Assistant information commissioner David Smith said the government had failed to make a business case for data retention.
The government has made it clear that it will introduce compulsory data retention, if the voluntary system fails.