The plan to introduce ID cards "fundamentally alters the relationship between citizens and state", an all-party group of peers has warned.
Charles Clarke says cards are vital to fight terrorism
The House of Lords Constitution Committee report has criticised the lack of safeguards in the government's Identity Cards Bill.
The bill has cleared the Commons but with the government's majority slashed to its lowest since the election.
It now goes to the House of Lords where it faces a further rocky ride.
In the report, Liberal Democrat Lord Holme of Cheltenham said: "Contrary to the government's assertions, the committee reaffirms that the bill fundamentally alters the relationship between citizens and the state.
"The committee firmly reject government claims that, in respect of privacy, ID cards are comparable to driving licences and passports.
"If Parliament decides identity cards are needed, it must urgently consider amendments to introduce proper safeguards.
"Parliament should not allow the home secretary such powers to administer this significant and complex scheme."
'Voluntary scheme' pressed
The committee concludes that an independent body - and not the government - should be the custodian of the National Identity Registrar.
It should have proper safeguards to prevent improper access to data by public servants and others.
The proposed National Identity Scheme Commissioner should be independent of government, with the power to investigate complaints and be able to report directly to Parliament, the peers say.
They also want the bill's scope to be limited to the "voluntary phase".
If the scheme is extended compulsorily to the entire population, then new legislation should be required, the peers say.
The bill was given a third reading in the Commons on Tuesday by 309 votes to 284, a government majority of just 25.
Home Secretary Charles Clarke defended the measure, saying it would not remove civil liberties but give people more control over their identities.
He said the bill would set limits on the information that could be stored on the database register.
"There will be no criminal convictions on that register, no medical records, no financial records, no political or religious opinions," he said.
Any possible linkage to details held in the Police National Computer was also removed during the bill's Report Stage.
But Labour's Bob Marshall-Andrews said the bill was "the most illiberal piece of legislation we have been asked to pass in this House for half a century".
Edward Garnier, for the Tories, said: "It is wholly unhealthy for us as a Parliament to give this government unseen powers over the citizen and over the way in which he conducts his or her life."
Under the scheme, face, iris and fingerprint scans will be used to identify people.
Peers are expected to begin debating the bill on Monday, 31 October.