Under the proposals, telecoms operators and Internet service providers would have to keep records of emails, telephone calls and text messages for between 12 months and three years. Law enforcement agencies would be able to see who had sent and received these communications, although the content of these communications would not be stored.
Home secretary Charles Clarke claims that the powers would help to establish links between individuals.
"Telecommunications records, whether of telephones or of emails, which record what calls were made from what number to another number at what time are of important use for intelligence," said Clarke, according to reports.
The UK is one of several countries advocating the introduction of such measures over recent months. Other EU members have opposed them, fearing they would erode civil liberties.
Back in June the European Parliament rejected draft legislation introduced by France, Ireland, Sweden and the UK, amid fears that the proposals were illegal.
"There are sizable doubts on the choice of the legal basis and the proportionality of the measures. It is also possible that the proposal contravenes Article eight of the European Convention on Human Rights," the report from the parliamentary committee on Civil Liberties, Justice and Home Affairs says.
The committee also criticised the proposal because the data would be difficult to analyse and criminals could find a way around it.
"Given the volume of data to be retained, particularly Internet data, it is unlikely that an appropriate analysis of the data will be at all possible," the report says. "Individuals involved in organised crime and terrorism will easily find a way to prevent their data being traced."
The European Parliament's civil liberties committee has estimated that the proposals could cost large ISPs and telcos up to £120m to set up, and millions of pound a year to run.
silicon.com's Sylvia Carr contributed to this report