Justice Secretary Jack Straw has ordered an inquiry into claims police bugged a Muslim Labour MP as he visited a constituent in jail.
Tooting MP Sadiq Khan and Babar Ahmad were recorded twice in Milton Keynes's Woodhill Prison, the Sunday Times says.
The US is seeking to extradite Mr Ahmad on suspicion of running websites raising funds for the Taleban.
Mr Straw said it was "completely unacceptable" for an MP to be recorded while talking to a constituent.
The bugging is said to have been carried out by officers from Scotland Yard's anti-terrorist branch during visits by Mr Khan to the Milton Keynes jail in 2005 and 2006.
The 37-year-old MP and government whip has campaigned for Mr Ahmad's release.
The detained man faces no charges in the UK and is awaiting a decision from the European Courts to discover if he will be extradited to the US.
According to the newspaper, the bugging device was hidden inside a hollowed-out table in the jail's main visiting hall.
The paper says it has seen a document showing there were internal concerns about bugging the MP, who is also a lawyer, but it went ahead anyway.
Scotland Yard said it was not prepared to comment on the claims.
Jack Straw, Justice Minister, said he had no knowledge of the facts but has ordered an internal inquiry.
He added: "It is completely unacceptable for an interview to be conducted by a MP on a constituent matter or in any other issue to be recorded."
The bugging of MPs by police has been barred since 1966. A principle was established by Harold Wilson's government, following a series of eavesdropping scandals, that conversations between constituents and their MPs should be confidential.
The bugging allegations concerned meetings at which he and Mr Ahmad had discussed sensitive personal and legal matters.
And other MPs have reacted angrily to the revelations.
Khalid Mahmood, MP for Birmingham Perry Barr, said it sent out a difficult message, not just for Muslim people but for British people.
"I don't think for a minute Sadiq Khan would do anything not in the interests of this country. He is a member of this country, of parliament and is a whip and what has happened is highly questionable," he said.
"It's very regrettable. This member of Parliament deserves the respect which he has been given by his constituents.
"If he felt there was an issue of national interest Mr Khan himself would have made police aware. It is the wrong way for police to act."
His views were echoed by Thurrock MP Andrew McKinlay said it was "wholly unacceptable" for MPs to be under surveillance.