Trevor Phillips, the chairman of the Commission for Racial Equality, said that multiculturalism was out of date and no longer useful, not least because it encouraged “separateness” between communities. As British-born Muslims burnt the Union Jack on the streets of London yesterday, he said that there was an urgent need to “assert a core of Britishness” across society.

In an interview with The Times, he said that multiculturalism — one of the founding principles of his own organisation — “means the wrong things”. He added: “We are now in a different world from the Sixties and Seventies.

“What we should be talking about is how we reach an integrated society, one in which people are equal under the law, where there are some common values.”

He said that young Muslims were being indoctrinated by extremists who told them that they would never be part of this society because of their colour or religion.

“The first thing we must do is call them British, again and again and again, tell them they are British Muslims and we accept them,” he said.

However, the other half of the bargain was to demonstrate that being British meant that they had to “work by the rules of British people — and that excludes terrorism”.

The Home Office has already launched citizenship ceremonies for British immigrants. It is also considering plans for “citizenship classes” to help them to integrate into society and learn the English language.

In a Cabinet discussion on Thursday, Tony Blair told colleagues that Britain must win a battle for the hearts of its Muslim citizens.

The Government also fears that rows over immigration and asylum, as well as the threat of terrorism, are fuelling racial tension and could become a significant factor in the next election.

Mr Phillips is a new Labour ally of the Prime Minister and his views are understood to chime with those within Downing Street, which has become increasingly alarmed by the radicalisation of a small section of Muslim youth. This week a series of police raids resulted in the arrest of a number of UK citizens suspected of plotting terrorist attacks.

Mr Blair has privately compared the fundamentalists recruiting young British Asians into groups with possible terrorist links to the Trotskyite infiltration of the Labour Party in the 1980s.

He plans to invite leaders of Britain’s Muslim communities to a Downing Street summit within the next few weeks for discussions over what the Government can do to help them to stem extremism. A No 10 source said: “The Cabinet recognised there is a need to engage with some of the issues emerging in the Muslim community, its relations with other parts of the population and problems within itself.”

Mr Blair has been encouraged by the statement from the Muslim Council of Britain this week urging mosques and all Islamic people to report possible terrorists to the police.

In his interview today, Mr Phillips said: “I know there are real worries about immigration at the moment, but there is a lot of heat being generated on the subject and not much light. I wish everybody would just draw breath for a moment and think about what this country needs.

“In this country, London knows it needs migrants, be they American chief executives or Czech carpenters. Scotland needs migrants — they have a programme for it; but East Anglia probably does not and maybe you would treat it in a different way.”

However, he added: “On this issue, people are dragging out hints and innuendoes way beyond the evidence which supports it. They should not feed anxieties.”

Mr Phillips has recently spoken to the Press Complaints Commission about the way that immigration and asylum are covered by some national newspapers, and is also holding talks with the main political party leaders to ensure that any debate on the subject is not fought out “on ground shared with racists”.

“We have a choice. We can behave responsibly in the British tradition of recognising we can manage these things pro-perly, or we can talk as if diversity is a bad thing and deny the enormous contribution immigrants have made in every area of our national life.”

Lord Tebbit, the former Tory chairman whose famous “cricket test" for cultural integration in the 1980s outraged liberal opinion, welcomed Mr Phillips’s statement.

He said: “From his point of view, I think it’s actually rather a brave conclusion.

“The intellectuals on the Left, who have been the great drivers for a multicultural society, I think have now realised what I have been saying. I think the Left is beginning to see the dangers of that sort of society and I welcome that. If we can make common cause around the idea that the problems don’t revolve around so much as ethnicity as culture, then we have moved a huge step on.”

The Union Jack was burnt outside the Central Mosque in Regent’s Park, London, by a small group of Muslim extremists, who chanted: “UK, you will pay, bin Laden on his way.” Their protest dismayed the 2,000 Muslims who had attended the mosque for afternoon prayers.

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