Charles Kennedy says internment makes 'martyrs'
Mr Kennedy said the plans, which include internment without trial for some suspected foreign terrorists, would mean "suppressing our own individual rights" and hand a victory to the people behind the September 11 attacks.
The Lib Dem leader accused Home Secretary David Blunkett of going "too far, too fast" with proposals intended to protect the public against future attacks.
Speaking on BBC One's War Report he said Lib Dem MPs would vote against the Anti-Terrorism, Crime and Security Bill when it is debated again in the Commons on Monday, and stall its progress in the Lords unless the government "retreats".
'Martyrdom'
Mr Kennedy said his party agreed with "quite a lot" of the government's proposals, but more attention needed to be given to getting the "balance right".
He warned that rushed legislation often remained law for too long, and drew comparisons with the use of internment against suspected terrorists in Northern Ireland.
Instead of internment Mr Kennedy said he wanted people with proven terrorists links put before a court and, if possible, deported.
Mr Kennedy said: "It is not good to make martyrdom of certain individuals if you can deal with it in a more properly processed legal way which recognises the proper rights of the citizen."
He added: "You can take effective action against people without the majority of law-abiding, peace-keeping individual people in this country having to suffer a diminution of their individual civil rights."
Racial hatred
Although the Lib Dem's decision to vote against an unchanged Bill would make little difference in the Commons, it could have a greater impact in the Lords where they have a stronger presence.
Mr Kennedy said Lib Dem peers were also negotiating with Conservative and cross-bench peers in an attempt to win their support.
Proposals to outlaw incitement to racial hatred should also be dropped from the Bill, the Lib Dem leader said.
"There is a sense that the Home Office has dusted down from the shelves one or two items that really don't belong in this legislation at all and think this is the opportunity to push something through," he added.