Britain's enemies are "rubbing their hands with glee" over whistleblower Edward Snowden's NSA leaks, the MI6 chief said.
GCHQ have launched an online code breaking competition to find people capable of joining the Government's national cyber security teams.
The Foreign Secretary said British intelligence would never use its partnership with the United States to get around UK laws.
Nick Clegg has said Britain's intelligence services should be overseen by a single watchdog in the wake of a series of privacy scandals.
He said the watchdog, dubbed the Inspector General for the UK intelligence services, would:
- Have "reinforced powers, remit and resources"
- Bring together the present Interception of Communications Commissioner and Intelligence Services Commissioner
- Allow appeals against decisions of the Investigatory Powers Tribunal and publication of the reasons for rulings
- Put a member of the opposition in charge of Parliament's Intelligence and Security Committee "to avoid accusations that the committee is too cosy with the Government of the day"
The Deputy Prime Minister has called for a rethink of the way intelligence services collect data en masse following the revelations of US National Security Agency whistleblower Edward Snowden.
Writing in the Guardian, Nick Clegg set out a series of reforms he hopes his Conservative coalition partners will back.
These included annual reports on requests made to internet and telephone providers, changes to the intelligence and security commission and a website about the work of British security agencies.
The Liberal Democrat leader said a respected security think-tank had agreed to carry out an independent expert review of "big data" and privacy issues in a bid to secure consensus on other changes.
"It is in all our interests that the intelligence agencies are able to operate successfully. Their effectiveness, and ultimately our own safety, depends on their ability to command public trust," Mr Clegg wrote.
Internet company Yahoo! has called claims that UK spy agency GCHQ intercepted and stored webcam images of millions of users as a "whole new level of violation".
In its latest report on files leaked by US whistleblower Edward Snowden, the Guardian newspaper claims a surveillance programme operated by GCHQ, collected still images of Yahoo webcam chats in bulk.
In a furious reaction to the report, a Yahoo spokeswoman said: "We were not aware of, nor would we condone, this reported activity.
"This report, if true, represents a whole new level of violation of our users' privacy that is completely unacceptable and we strongly call on the world's governments to reform surveillance law consistent with the principles we outlined in December.
"We are committed to preserving our users' trust and security and continue our efforts to expand encryption across all of our services."GCHQ declined to comment on the claims.
UK intelligence agency GCHQ "intercepted and stored" the webcam images of internet users who were not suspected of any wrongdoing, the Guardian claimed, citing secret documents.
Files dated between 2008 and 2010 allegedly show a monitoring programme, known as "Optic Nerve", stored still images from Yahoo webcam chats and saved them to agency databases with the help of its US counterpart the National Security Agency.
GCHQ has consistently said its activities are necessary and "carried out in accordance with a strict legal and policy framework”.
A Foreign Office spokesman said: "Iain Lobban is doing an outstanding job as director GCHQ.
"Today is simply about starting the process of ensuring we have a suitable successor in place before he moves on as planned at the end of the year."
Sir Iain has already had one extension to his tenure as director since his appointment in June 2008.
By the time he leaves, among the current crop of government department heads only Sir Nicholas Macpherson at the Treasury will have served for longer.
The head of the GCHQ intelligence gathering agency is to stand down, the Foreign Office has said.
Sir Iain Lobban, 53, is leaving in what was said to be a long-planned move.
Officials denied his departure was linked to the disclosures of the former US intelligence contractor, Edward Snowden.
Responding to reports that UK and US intelligence agencies have been developing capabilities to take advantage of smartphone applications to gather users' private information, a spokesman for British intelligence agency GCHQ told the Guardian:
– GCHQ spokesman
It is a longstanding policy that we do not comment on intelligence matters.
Furthermore, all of GCHQ's work is carried out in accordance with a strict legal and policy framework which ensures that our activities are authorised, necessary and proportionate, and that there is rigorous oversight, including from the Secretary of State, the Interception and Intelligence Services Commissioners and the Parliamentary Intelligence and Security Committee. All our operational processes rigorously support this position.
Technology companies have reached a deal that will allow them to tell the public in greater detail about the spying-related court orders they receive, the US Justice Department has said.
The agreement would settle demands from companies such as Google and Microsoft for more leeway to disclose data about the court orders.
Companies will now be able to disclose:
- The number of orders from the government related to criminal activity
- The number of orders from the government related to secret national security
- The number of orders from a foreign intelligence service related to secret national security
- If those orders covered just email addresses or further information
White House spokesman Jay Carney said US surveillance agencies were only interested in collecting data on people considered a threat to the United States.
Mr Carney told a regular White House news conference:
To the extent data is collected by the NSA [National Security Agency] through whatever means, we are not interested in the communications of people who are not valid foreign intelligence targets, and we are not after the information of ordinary Americans.
British intelligence agency GCHQ "would not confirm of deny the existence of the Squeaky Dolphin" monitoring programme, according to NBC News.
A spokesperson for the agency said GCHQ's work was "carried out in accordance with a strict legal and policy framework”.
This "ensure[s] that our activities are authorised, necessary and proportionate, and that there is rigorous oversight, including from the Secretary of State, the Interception and Intelligence Services Commissioners and the Parliamentary Intelligence and Security Committee", the spokesperson added.