Jacqui Smith, the Home Secretary, has scrapped plans to build a giant database to monitor the UK’s e-mails, phone calls and internet activity. Instead, records of every electronic communication will be held by private companies at an estimated cost to the taxpayer of £2 billion over ten years.

The Home Secretary admitted that a state-run central store of electronic data was an “extreme” solution, amounting to an unwarranted intrusion of privacy.

Although a Home Office consultation document released yesterday concluded that the giant database was the best option on grounds of cost and technical feasibility, the Government has accepted that growing concern about the “surveillance society” made the idea a non-starter.

Instead, the Home Office proposes that internet service providers (ISPs) hold all electronic communications, at an estimated cost to the taxpayer of £2 billion over ten years.

Last night Richard Thomas, the Information Commissioner expressed concern at the amount of information the Government wants to collect. Mr Thomas said: “We should remember that communication records – Who? When? Where? – can be highly intrusive even if no content is collected.

“You can tell an awful lot about some people’s personal circumstances from the people they are talking to and the websites they visit,” he said. “It is important that the proposals are tightly defined and minimise the level of intrusion, with appropriate safeguards in place.”

The dropping of the plans is a defeat for the police and security services, who wanted rapid access to the information to aid investigations into terrorism and other serious crimes.

Ms Smith said that it was necessary to ensure police, intelligence services and other public authorities retained the capability to obtain communication data. “However, to be clear, there are absolutely no plans for a single central store,” she said.

“We recognise that there is a delicate balance between privacy and security, but to do nothing is not an option, as we would be failing in our duty to protect the public.”

The consultation paper said that the Government recognised the privacy implications in holding all communications data from the UK for a 12-month period in one single database.

ISPs are currently required to hold communications data — the who, when, where and how, but not the content — for 12 months under an EU directive that came into force earlier this month.

Under yesterday’s proposals, legislation will extend the data collected from the UK firms’ own services and tracking to external data from “third parties” outside the country.

This goes much further than the data currently collected for billing purposes but Ministers insist that it is needed if the police and security services are to maintain their ability to investigate crime.

Ms Smith said that while the new system could record a visit to a social networking such as Facebook, it would not record personal and private information such as photos or messages posted to a page.

Chris Grayling, the Shadow Home Secretary, said: “It is good that the Home Secretary appears to have listened to Conservative warnings about ‘Big Brother’ databases.”

Mr Grayling did not oppose the idea of the private sector storing the information or the inevitable increase in the amount of data they will collect.

Shami Chakrabarti, the director of Liberty, said: “We applaud the Home Office climbdown on the super Big Brother database and thank the broad coalition of sensible voices who brought it about. It is a clear signal that the public interest in personal privacy can no longer be ignored.”

Simon Davies, the director of Privacy International said: “Scrapping the central database is a red herring. The real threat arises from the sheer scale of the data the government wants to collect. Once these data sources are joined together we will have lost privacy for all time.”

Nicholas Lansman, Secretary General of the Internet Service Providers Association, said: “We advocate a proportionate approach to data retention. To ensure that any updated law enforcement requirements do not place extra financial burdens on internet service providers, we stress the importance of cost recovery.”

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