Prime Minister Gordon Brown has backed the limited use of intercept evidence in court, after an independent review.
Phone tap evidence is not admissible in court
The Chilcot report says phone tap evidence was needed in some cases in England and Wales for security reasons.
But it says material should not be used against the wishes of the agencies collecting it - or if it could have been gained in another way.
Mr Brown told MPs detailed plans would now be drawn up to implement the report findings "as soon as possible".
He told MPs in a Commons statement: "The use of intercept evidence characterises a central dilemma that we face as a free society - that of preserving our liberties and the rule of law, while at the same time keeping our nation safe and secure."
But he also stressed there would be further extensive work to ensure that sensitive surveillance techniques were protected under any new regime.
The Chilcot report also stated there was no evidence that the introduction of intercept material as evidence would reduce the need for control orders, added Mr Brown.
Neither did it rule out the need for extending detention of terror suspects beyond the current 28 day limit as some campaigners have claimed, the prime minister told MPs.
He announced the setting up of a cross-party group, chaired by Sir John Chilcot, to implement the report's findings - provided nine detailed tests were met.
These included the potential cost of transcribing phone conversations and e-mails and any impact on the co-operation between intelligence agencies and police.
Previous prime ministers have rejected the use of phone tap evidence over fears it would reveal police and security agencies' techniques and create too much paperwork.
Mr Brown told MPs there were still "very big hurdles" to clear before the changes could become law but he was confident that would happen.
Conservative leader David Cameron welcomed the Chilcot report, but warned that the implementation body must not be a "talking shop for further delay".
He added: "It is clear what needs to be done - intercept in court so we catch, convict and imprison more terrorists. We must not put off endlessly what needs to be done."
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Lib Dem leader Nick Clegg also welcomed the review, which he said left the "door ajar" for implementation of intercept evidence in court.
The UK is one of a few countries that bans such evidence and the security services are opposed to its use.
But Mr Brown told MPs Britain was "unique" because of its close cooperation with intelligence agencies in other countries and the fact that it was also bound by EU rules, unlike the US or Australia.
Not a 'silver bullet'
Sir Paul Lever, chairman of the Royal United Service Institute and former chairman of the Joint Intelligence Committee, said the intelligence were concerned their phone and e-mail interception techniques would be revealed.
But he said the use of such evidence would be restricted as intelligence agencies would retain control of the material and could veto its use in court.
He told BBC Radio 4's The World at One: "It is not going to be something that is widespread. I think the government is only going to use this in cases where it is absolutely vital."
Lib Dem peer, Lord Carlile, the government's reviewer of anti-terror laws, broadly welcomed the phone tap idea but warned the government not to see it as a "silver bullet".
"It is vitally important not to view intercept evidence as a silver bullet which will exclude the need for other things, " he said.
"Having been independent reviewer of terrorism legislation for six-and-half years I am firmly of the view that a very small number of cases will gain if intercept evidence becomes admissible.
"But it may be one or two cases in the next three of four years at most."