The Government is to rename the offence “hatred against persons on racial or religious grounds” to make clear that it is not religious jokes, beliefs or ideas that are being targeted.

Opponents of the legislation dismissed the change as no more than a “slight improvement”, alleging that it would still imperil the country’s tradition of free speech.

Fiona Mactaggart, a Home Office minister, conceded that even under its new name the offence would place new boundaries around freedom of speech. “It is right and the State has a right to put some boundaries on free speech,” she said.

The legislation, part of the Serious Organised Crime and Police Bill, goes through its report stage and will receive its final reading in the House of Commons today before entering the House of Lords, where it is expected to take a month before becoming law.

The new incitement offence will carry a maximum sentence of seven years in prison.

The provisions will make it an offence for a person to use threatening, abusive or insulting words or behaviour with the intention or likelihood that they will stir up hatred against a group of people based on their religious beliefs.

The Government’s retreat comes two weeks after Ms Mactaggart had a private meeting at the Home Office with Mr Atkinson, Mr Rushdie and Geoffrey Robertson, QC, a leading human rights barrister.

The trio also put their names to a letter to the House of Lords, which was also signed by the authors Ian McEwan and Zadie Smith, and hundreds of members of PEN, the writers’ organisation.

At a meeting with the Home Office minister, the protesters said that the clause would radically restrict free expression.

PEN, which has run a campaign opposing the legislation, claimed that Ms Mactaggart had sought to reassure the delegation that legitimate criticism of religion or humour would not be targeted and that prosecutions would take place only at the discretion of the Attorney-General.

But the delegation responded that it was “not reassured”, because “laws outlive the government that brought them in”.

Mr Robertson told Ms Mactaggart that the law was “unnecessary and clumsily framed yet carries a very serious sentence”. He said that the Public Order Act already included the offence of incitement to religous hatred and was perfectly adequate.

Mr Atkinson said that comedians had told him that similar legislation had “gone badly wrong” in Australia.

In the letter to the House of Lords, English PEN said that the proposed legislation would “gravely undermine both freedom of speech and [Britain’s] long-standing climate of tolerance”.

Ms Mactaggart said: “The Government has put down an amendment which is changing the title in order to clarify something that I think has created some anxiety.

“It is hatred against people rather than hatred of ideas that we are trying to prohibit. The name of the offence has helped to create a context in which some of this confusion has flourished.”

The law against inciting racial hatred protects Jews and Sikhs but not Muslims, Christians or other religious groups. The Board of Deputies of British Jews believes that the incitement to racial hatred offence has reduced the amount of anti-Semitic literature.

The Government believes that the new religious hatred offence will have a symbolic impact, particularly in reassuring Muslim communities that have felt vulnerable since the terrorist attacks of September 11, 2001.

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