Plans to give police and intelligence services the power to monitor all email and internet use in the UK need a "fundamental rethink", Nick Clegg says.
The deputy prime minister said he would block the draft Communications Data Bill and push for plans ensuring "the balance between security and liberty".
His comments came as a committee of MPs and peers criticised the bill's scope.
The Home Office said the new laws were needed "without delay" to stop serious crimes such as terrorism.
The Conservative and Liberal Democrat leaderships agree on the need for new measures, but they disagree over their scope.
The plans in the draft bill include:
- Internet service providers having to store for a year all details of online communication in the UK - such as the time, duration, originator and recipient of a communication and the location of the device from which it was made.
- They would also be having to store for the first time all Britons' web browsing history and details of messages sent on social media, webmail, voice calls over the internet and gaming, in addition to emails and phone calls
- Police not having to seek permission to access details of these communications, if investigating a crime
- Police having to get a warrant from the home secretary to be able to see the actual content of any messages
- Four bodies having access to data: the police, the Serious and Organised Crime Agency, the intelligence agencies and HM Revenue and Customs
Civil liberties campaigners have described the proposals as a "snoopers' charter", but Home Secretary Theresa May insists they are vital for countering paedophiles, extremists and fraudsters.
A report from the Joint Committee on the Draft Communications Bill, made up of MPs and peers, accepted a new law was needed to help police fight crime and tackle security threats organised online.
But it warned ministers would be able to demand "potentially limitless categories of data" unless the draft bill was amended.
It called for "safeguards" over the new powers to prevent abuse and accused the government of producing estimates of the cost of implementing the plans which were not "robust" enough.
The "net benefit figure" was "fanciful and misleading", it said.
The MPs and peers added that the draft bill paid "insufficient attention to the duty to respect the right to privacy" and went "much further than it need or should for the purpose of providing necessary and justifiable official access to communications data".
Mr Clegg, the Liberal Democrat leader, said the committee had raised "a number of serious criticisms - not least on scope, proportionality, cost, checks and balances, and the need for much wider consultation".
"It is for those reasons that I believe the coalition government needs to have a fundamental rethink about this legislation. We cannot proceed with this bill and we have to go back to the drawing board."
But he added: "The committee did not, however, suggest that nothing needs to be done. They were very clear that there is a problem that must be addressed to give law enforcement agencies the powers they need to fight crime. I agree.
"But that must be done in a proportionate way that gets the balance between security and liberty right."
In its report, the committee said the home secretary would be given "sweeping powers to issue secret notices to communications service providers, requiring them to retain and disclose potentially limitless categories of data".
But it added: "We have been told that she has no intention of using the powers in this way. Our main recommendation is therefore that her powers should be limited to those categories of data for which a case can now be made."
If these powers needed to be enhanced in future, this should be done with "effective parliamentary scrutiny", it said.
The home secretary wants the bill in place next year.
Security minister James Brokenshire told BBC Radio 4's Today programme there was a "legitimate debate" to be had.
He added that he wanted to "rebalance" the bill, so that "it's properly reflecting the needs of the collective and the needs of the individual".
Mr Brokenshire also said: "If there were to be any extension, that would have to be through the full scrutiny of Parliament. We are saying very clearly that we accept that."
He added: "We know that we need to work this through the coalition."
For Labour, shadow home secretary Yvette Cooper said the government was "making a complete mess of a very important issue".
"It is important that the police and security services can keep up to date with modern technology, but this bill is too widely drawn, is unworkable and gives far too much power to the home secretary without proper safeguards."
She added: "It is astonishing that the Home Office have had so little discussion with the internet companies who need to deliver this legislation. The Government have been slipshod with this bill from the word go."
A Home Office spokesman said: "This legislation is vital to help catch paedophiles, terrorists and other serious criminals and we are pleased both scrutiny committees have recognised the need for new laws.
"We have now considered the committees' recommendations carefully and we will accept the substance of them all. But there can be no delay to this legislation. It is needed by law enforcement agencies now."
The Intelligence and Security Committee, which has sent a classified report on its findings to Prime Minister David Cameron, after speaking to the security services, called for more detail to be included in the draft bill.
It recommended that it be "future-proofed" to ensure extra powers are not added without scrutiny, adding that there had been "insufficient consultation" between ministers and internet providers.