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Deputy Prime Minister Nick Clegg said:
"The first duty of any government is to keep the public safe and the committee that's looked at the Home Office proposals say there is a problem and we need to do something about it. I agree with them.
"But we equally have a duty to make sure that we do that in a way which doesn't lead to unnecessary or excessive snooping on people's emails and telephone calls.
"The committee has said the proposals as they're presently drafted are over the top in important respects, not workable in other respects and possibly very expensive for British taxpayers.
"That's why we now need a fundamental rethink, go back to the drawing board and come back with proposals where we get the balance right."
Wikipedia founder Jimmy Wales said: "I think that's one of the biggest dangers is the impact on the start-up ecosystem in Shoreditch. If we want to host the next Facebook we want those young companies 100 per cent focused on making a great product that people enjoy.
"Paying them to deviate from their normal task in order to comply with complex security regulations; it's just going to kill it.
"Certainly we already know that there is a brain drain to Silicon Valley. Loads of young entrepreneurs will go there. The harder we make it for people to do business here the easier we make it for the US to get all our best talent."
Downing Street has responded to the furore surrounding the Home Office's proposed Communications Bill, saying: "We understand that this is a controversial subject."
David Cameron's official spokesman told a regular Westminster press briefing: "That is why the Government took the decision to subject the Bill to pre-legislative scrutiny."
Wikipedia founder Jimmy Wales also said the 'snooper's bill' makes the UK less attractive for start-ups.
In an open letter in The Sun, Home Secretary Theresa May has said the Home Office will "accept the substance" of suggestions from MPs on the 'snooping bill'.
Lib Dem home affairs spokesman Julian Huppert has issued a big warning over the breadth of the Home Office's plans for new data laws, dubbed by critics as a 'snooping bill'.
Mr Huppert said many people would be "uncomfortable" if websites they visit, such as for abortion providers or marriage counsellors, would be logged under new laws.
He also expressed concerns that the location a text was sent from could be stored, as he dismissed Theresa May's support for the bill.
Home Office Minister James Brokenshire has said he will listen to concerns on the 'snooping bill' but added there is an urgency to get it through to protect the public.
Latest ITV News reports
The Government's draft Communications Bill is to be re-written after a Commons Committee branded it 'overkill'.