Ruth Kelly has rejected claims that the government is "demonising" Muslims, after reports it is to ask universities to spy on student suspects.
Ms Kelly says extremism is "an issue for us all"
The communities secretary said many groups understood the need to work in a new way to "face up to" the threat.
She urged council chiefs to help battle extremism - saying it was an issue for all communities, not just Muslims.
But she denied reports universities would be urged to spy on individual students suspected of extremism.
A report in the Guardian newspaper said lecturers and staff would be asked to watch Muslim students suspected of involvement in extremism - and report them to Special Branch.
"I don't recognise the way in which that work has been portrayed," she told BBC Radio 4's World At One programme.
"This is not about picking on individual students or even spying on them, it's about sensible monitoring of activities to make sure individual students on campuses are protected."
Ms Kelly said that the guidelines were still being worked out, in discussion with universities, and it was important to "strike the right balance".
It followed comments from University and College lecturers' union joint leader Paul Mackney, that they were concerned about being "sucked into a kind of anti-Islamic McCarthyism".
The government continues to face criticism from Islamic groups over whether Muslim women who wear full face veils are hindering integration, sparked by comments by Commons leader Jack Straw.
Minister Phil Woolas angered Muslim groups by calling for a Muslim teaching assistant suspended for refusing to remove her veil to be sacked.
The head of the Muslim Council of Britain, Muhammad Abdul Bari, has written to Ms Kelly, claiming that a recent "drip feed" of ministerial statements over the issue has "stigmatised" the entire Muslim community.
He told BBC Radio 4's Today programme: "What is happening, especially in the last few months, has been a barrage of demonisation of the Muslim community to such an extent that the community is now scared and the whole community feels vulnerable."
Nick Clegg, for the Lib Dems, said the government could not "harangue" Muslims to do its bidding, while simultaneously creating resentment through its foreign policy and security legislation.
But in a letter to Muhammad Abdul Bari, Ms Kelly said it was "absolutely untrue" to suggest the government would only engage with groups who agree with it on issues like foreign policy.
She said she was supported by several Muslim organisations, and her door was open to any group showing a genuine commitment to tackling extremism.
"This can be done without having to agree with the government on every issue. Protecting freedom of speech is one of the key principles I am setting out to defend by isolating extremists," she wrote.
On Monday Ms Kelly told a meeting of local authority officials the battle against extremism in the UK was the biggest security issue for local communities and should be fought by everyone - not just Muslims.
She urged the councils to respond to the ways the world has changed since the 11 September attacks on the US and the 7 July bombings in London.