The Government admitted this week that its definition of "communications data", which underpins its controversial Regulation of Investigatory Powers (RIP) Bill, is so flawed that it will have to be rewritten.
Government spokesman Lord Bassam said he will be taking into account the industry's views in coming up with a new definition.
However, despite this last minute climb-down, Lord Bassam refused to say whether the intent of the new definition would exclude search engine requests and logs of individual Web pages from being intercepted without a warrant.
"It was not clear from what the minister said whether Web sites that people consult and follow through are intended to be included in the new definition. We shall have to wait for the report stage to find out," said Conservative spokesman Lord Cope.
This means that the RIPBill could still require IT departments to hand over encryption keys to law enforcement agencies, without informing company directors - a practice that could breach commercial confidentiality.
Bassam, speaking in the committee stage of the Bill, also refused to deny that the use of black boxes to acquire communications data directly and without the knowledge of ISPs would be unlawful.
"It is now abundantly clear that the Government is making this Bill up as it goes along," said Caspar Bowden, director of the Foundation for Information Policy Research. "The consequences for the Internet industry and e-commerce for Britain will be apocalyptic unless these incompetents are stopped," he added.
Next week sees more discussion of the Bill, which has gone through its third reading in the Commons. The Bill goes into the report stage in about three weeks, at which point the Government will have to compromise or bounce the Bill back to the Commons.
The RIP Bill has been roundly criticised by all sectors of industry, which fears that it threatens to undo the Labour government's policy to make the UK the best place in the world to do e-business.