Government plans to hold more inquests and court cases behind closed doors in order to appease American intelligence agencies appeared to be in tatters after deputy prime minister Nick Clegg told Cabinet colleagues he could not support the proposals in their current form.
The intervention by Clegg came as MPs and peers on the cross-party Joint Committee on Human Rights savaged Justice Secretary Ken Clarke's "inherently unfair" plans.
Clegg's concerns were set out in a letter to the Government's powerful National Security Council in which he warned that his Liberal Democrat colleagues would not be able to back the proposals without major changes.
The plans are aimed at finding a way of managing sensitive evidence from the security services, but Clegg said their concerns "cannot be allowed to ride roughshod over the principles of open justice".
He said the powers to take evidence in secret should not apply to inquests and that judges rather than ministers should decide when the measures are used in a small number of civil cases expected to be affected, the Daily Mail reported.
But Clark said that the current rules meant the intelligence agencies of the United States were starting to withhold information due to fears it would be revealed in British courts.
"The Americans have got nervous that we are going to start revealing information and they have started cutting back on what they disclose," he said. "If they fear our courts they won't give us the material."
He told BBC Radio 4's Today programme: "Sometimes national security requires you to give a guarantee of complete confidentiality."
The Joint Committee on Human Rights heaped further pressure on Clarke to perform a u-turn in a damning report which said the controversial and wide-ranging proposals were based on "vague predictions" and "spurious assertions" about catastrophic consequences.
In reality, the plans are a "radical departure from long-standing traditions of open justice" which should only ever be used when publicly disclosing material would carry "a real risk of harm to national security", the committee said.
Dr Hywel Francis, the committee's chairman, added it was "troubling" that the justice and security green paper "was not as clear as it should have been on the scope of its proposals or the narrowness of the justification for changing the law".
"Closed material procedures are inherently unfair and the Government has failed to show that extending their use might in some instances contribute to greater fairness," he said.
The committee added that the Government's "narrow concern" could be addressed by clarifying how public interest immunity, which enables sensitive material to be protected from disclosure, applies to national security information.
The report strongly criticised Clarke's green paper, saying his view that the plans were only intended to be used in a small number of cases "is clearly a change of position as there is no doubt that the proposals in the green paper are very broad in scope".
Responding to the committee's report, Clarke said the Government's proposals were "a common sense solution to a genuine problem in a very small number of cases".
"They will ensure that the Government is properly held to account when individuals challenge its actions in civil cases only, without revealing information which would compromise public safety," he said.
"This Government will do everything possible to uphold the principle of open justice.
"But British intelligence agents obviously cannot give evidence in open court about their sources, their techniques and their secret knowledge.
"This means that there is a compelling case for changing the current rules which stop judges considering any sensitive intelligence evidence at all, even where the case hinges on it, in compensation hearings or other civil cases.
"Under the current rules, even where a case has no merit, the Government is forced to pay out vast sums of taxpayers' money, and the public are left with no independent judgment on very serious matters."
The Justice Secretary went on: "This has been a consultation. I welcome the JCHR's contribution.
"We will listen to those who have made suggestions as we develop our plans.
"I am quite clear, though, that the current system is not working and needs to be reformed."