Plans for new legislation were announced on Monday in a wide-ranging response to the 11 September terrorist attacks on the US, and will go before Parliament in November.
Business groups said this week that they were concerned that the Government's plans, although voluntary, could lead to more draconian legislation in the future, with serious consequences for costs in communications and e-commerce.
The Home Office plans to consult telecoms and Internet companies to draw up a voluntary code of conduct, that would govern what sort of data they should keep, and for how long.
But government officials have suggested privately that the voluntary code could be enforced by civil action against companies that refuse to comply, said Caspar Bowden, director of the Foundation for Information Policy Research. "The Home Office is trying to have its cake and eat it - and not for the first time," he said.
The Confederation of British Industry said that the proposed legislation could add to the costs of businesses and harm e-commerce.
"If users feel their privacy is being infringed it will harm consumer confidence," said Pamela Taylor, senior e-business adviser.
"This new legislation will obviously also mean additional costs to ISPs and there is a very real danger of severe damage being done to the long-term growth of e-commerce," she said.
The proposed laws follow a study - commissioned in recent weeks by the Home Office from telecoms consultant John Horrocks - into the practicalities of data retention.
The Home Office said it had no plans to publish the findings of Horrocks' investigations.