The UK government is encouraging university chiefs to watch out for extremists on campuses and report suspicious people to the authorities.
Ruth Kelly said "moderate majority" must be protected
Education Secretary Ruth Kelly said they should protect free thinking but inform police of "unacceptable behaviour" by students or staff.
As she spoke Home Secretary Charles Clarke was giving details of proposed measures against glorifying terrorism.
There has been concern that ministers are seeking to "criminalise thought".
Ms Kelly was addressing the annual conference of Universities UK at their headquarters in Tavistock Square, London - where a bomb tore apart a double-decker bus on 7 July.
She told the vice-chancellors the "moderate majority" must be protected from harassment, intimidation or pressure and be free to study.
Higher education institutions must continue to "teach people to think for themselves and express themselves and to listen to and consider the opinions of others".
But they must also identify and confront unacceptable behaviour.
"They should be alert and be unafraid to set their own boundaries - within the law and with the law in support - in consultation with their own community and the wider community.
"That means informing the police where criminal offences are being perpetrated or where there may be concerns about possible criminal acts," she said.
When Mr Clarke outlined the plans last month, the Islamic Human Rights Commission issued a statement saying it viewed his proposed grounds for deportation as "the criminalisation of thought, conscience and belief".
Universities UK said after Ms Kelly's speech that it was updating its guidelines on extremism and intolerance to look at "the range of hate crimes and intolerance on campus".
It would provide focus on solutions to promote good relations, and guidance on dealing with situations that could impede those.
Lecturers' union Natfhe issued a statement saying it would closely examine any government proposals.
"Academics want to see campuses buzzing with discussion, debate and healthy political life, not stifled by fear," it said.
"There are real differences between illegal activities which should be tackled through law enforcement, breaches of university disciplinary procedures regarding racism, anti-Semitism or homophobia for which procedures already exist - and stopping 'unacceptable behaviour' which is a phrase entirely vague and open to abuse."
In her speech, Ms Kelly also set out a vision of 21st Century universities as having around them a complex of hi-tech companies and venture capitalists, feeding off their research.
Earlier this week, figures from the Organisation for Economic Co-operation and Development (OECD) suggested UK higher education had been falling behind leading industrialised competitors in funding increases and student numbers.
Ms Kelly did not mention that report, but said the government's target of 50% of young people experiencing higher education by 2010 - which is below the existing OECD average - might be too low.
She said the government respected universities' autonomy, but would continue to look at whether their provision of courses "seems out of step with the national need".
She expected to say more this autumn about part-time students after making "some difficult judgements".
But she said "some price rises for some students, or some courses, might be possible without adverse effects".