The government has scrapped plans to push through the controversial Communications Data Bill this parliamentary session and will hold a second public consultation in the new year.
This means the government could miss its self-imposed deadline to comply with the European Data Retention Directive by March 2009.
It is also expected to slow the progress of the Interception Modernisation Programme, a scheme to create a centralised database of all electronic communicationsbetween everyone in the UK. The government has already spent at least £1bn on the plan, which reports say could cost as much as £12bn.
The initial public consultation on the bill finished in August. Public reaction to the draft provisions has been heated. Critics, including the Information Commissioner's Office, have claimed the government is setting up a "Big Brother" surveillance system that is at odds with traditional British values and freedoms.
Home secretary Jacqui Smith said, "Before proceeding to legislation, I am clear that we need to consult widely with the public and all interested parties to set out the emerging problem, the important capability gaps that we need to address and to look at the possible solutions.
"We also need to agree what safeguards will be needed, in addition to the many we have in place already, to provide a solid legal framework which protects civil liberties.
"This consultation will begin in the New Year and I want this to be combined with a well-informed debate characterised by openness, rather than mere opinion, by reason and reasonableness. My aim is to achieve a consensus and I hope that others will approach the serious issues posed for our national security capabilities in the same spirit."
Smith said she wanted to make clear what the bill would not do. "There are no plans for an enormous database which will contain the content of your e-mails, the texts that you send or the chats you have on the phone or online," she said.
"Nor are we going to give local authorities the power to trawl through such a database in the interest of investigating lower-level criminality under the spurious cover of counter-terrorist legislation."