The Lib Dems say data-sharing proposals are 'outrageous'
Plans to allow people's details to be shared across government departments and agencies have been criticised as "draconian" in the Commons.
The Tories and Lib Dems said they would oppose the proposals as well as others to hold some inquests in private.
Minister Jack Straw said "responsible" data sharing would stop families having to speak to different agencies "many times over" when a relative died.
MPs are debating the proposals in the Coroners and Justice Bill.
Opening a second reading debate, Justice Secretary Mr Straw said the bill would be the first major reform of the coroners' service for more than 100 years and would improve it for bereaved families - especially those of servicemen and women.
But he was accused of using the controversial inquest proposals, dropped last year from counter-terrorism legislation, as a "red rag" to attract attention while data-sharing proposals were "smuggled" in.
The Information Sharing Orders would remove data protection restrictions that mean information can only be used for the purpose it was taken.
For the Liberal Democrats, David Howarth told MPs the "amazingly broad" proposals on data sharing were "outrageous" enough to reject the bill on its own.
He said the plans were not confined to public bodies, private companies in any country could also see people's information, he said, and there would be a greater risk of information being lost.
Mr Straw said bereaved families often had to speak to different departments and agencies over and over again when a loved one died.
He defended the plans, saying: "Responsible data-sharing between the relevant agencies would reduce the number of people who need to be notified of a death, thereby helping to relieve distress at a very difficult time."
Orders would be subject to safeguards and only be made when it was "in the public interest and proportionate to the impact it may have on the person affected," he said.
But for the Tories, Dominic Grieve said it amounted to a "seismic change in the relationship between the state and the citizen" and said it had "enormous" implications for civil liberties.
"What the government is proposing is to drive a coach and horses through the duty of confidentiality that the state owes to individuals," he said.
"The path we are on, I think, raises really serious possibilities of the oppressive state."
He said such a "draconian transformation in the law" deserved its own bill.
Among other measures in the bill is one to allow some inquests in England and Wales to be held without juries.
A measure to exclude relatives and journalists from some inquests had been dropped last year from counter-terrorism legislation, having been opposed by military families.
Mr Straw said the proposals had been brought forward because the "current state of the law and process is unsatisfactory" and two inquests were already unable to go ahead in public.
He said inquests would only be held in private in "very extreme" cases where if information got out there would be a "grave risk of death of individuals".
But his Mr Grieve said the plans "completely undermine" the point of an inquest and Mr Howarth said juries had traditionally provided "a check" on state power.
Several Labour backbenchers also criticised the plans during the debate - Chris Mullin questioned whether police might have used it to prevent a public interest inquest into the death of Jean Charles de Menezes - shot dead after being mistaken for a terrorist by officers.
Joan Humble said service families depended on inquests to find out how their loved ones died and would be "dismayed" at the idea of private inquests while Andrew Dismore, suggested it may contravene the Human Rights Act.
Mr Straw said there would be safeguards in place to stop the use of inquests without juries becoming widespread and said people would only be excluded from "parts of the inquest".
But he added he understood why MPs were "uncomfortable", adding: "It's a real difficulty. What we have to do is try and find a way through it."
The Conservatives say while there is much they agree with in the bill, they will try to get the data-sharing proposal removed and the Lib Dems moved their own amendment to stop it getting a second reading.
But the Lib Dem bid was defeated by 278 votes to 47, a government majority of 231 and the bill was given a second reading without a vote.