Under legislation expected in next month's Queen's Speech, internet companies will be instructed to install hardware enabling GCHQ – the Government's electronic "listening" agency – to examine "on demand" any phone call made, text message and email sent, and website accessed in "real time", The Sunday Times reported.
A previous attempt to introduce a similar law was abandoned by the former Labour government in 2006 in the face of fierce opposition.
However ministers believe it is essential that the police and security services have access to such communications data in order to tackle terrorism and protect the public.
Although GCHQ would not be able to access the content of such communications without a warrant, the legislation would enable it to trace people individuals or groups are in contact with, and how often and for how long they are in communication.
Nick Pickles, director of the Big Brother Watch campaign group, said: "This is an unprecedented step that will see Britain adopt the same kind of surveillance seen in China and Iran.This is true, they are backtracking on their explicit pledges made during the election.
"This is an absolute attack on privacy online and it is far from clear this will actually improve public safety, while adding significant costs to internet businesses.
"If this was such a serious security issue why has the Home Office not ensured these powers were in place before the Olympics?"
Shami Chakrabarti, director of the civil rights group Liberty, said that both the Conservatives and the Liberal Democrats had resisted the plan when they were in opposition.
"There is an element of whoever you vote for the empire strikes back," she told Sky News's Murnaghan programme.
"This is more ambitious than anything that has been done before. It is a pretty drastic step in a democracy.
"It was resisted under the last government. The coalition bound itself together in the language of civil liberties. Do they still mean it?"
It never ceases to amaze how it is the conservatives around the world who supposedly want to get government off citizens' backs are nevertheless the ones who are looking to expand powers like this so radically.
Expect tremendous opposition to this bill. Maybe they need a #TellDaveEverything hashtag to get it going...