The Home Secretary has instructed an independent review to consider whether allowing wire-tap evidence in court would jeopardise secret eavesdropping methods.

Jacqui Smith is understood to be particularly concerned to prevent terrorists from learning about new techniques for listening in to calls made over the internet.

Hopes were raised that the Government would overrule the objections of the security and intelligence services when an independent review into the admissibility of wire-tap evidence was set up this summer. The review group, made up of Privy Counsellors, has been working without publicity since July. It is expected to take evidence from prosecutors, MI5, GCHQ and others before recommending whether the law should be changed.

Sir Ken Macdonald, the Director of Public Prosecutions, is among those who want juries to see transcripts of tapped calls. He is supported by David Davis, the Shadow Home Secretary, and Nick Clegg, the Liberal Democrat spokesman for home affairs, who both argue that the move could reduce the need for more draconian measures. The Home Secretary, however, is not convinced and believes that any benefits may well be outweighed by the risks, particularly of revealing to terrorists the capabilities of GCHQ.

In the past, ministers have played down the value of intercepts, pointing out that encrypted communication over the internet could not be tapped. But it is understood that GCHQ may have cracked the problem and could already be listening in to such calls.

In assessing the balance of risk, the Privy Council group has been told to consider the “exposure of interception capabilities and techniques”.

The Home Secretary indicated that she was hardening her position against making wire-tap evidence admissible when she gave evidence to MPs last month. “Interception is a highly effective intelligence-gathering tool. It is precisely in order to be able to protect its effectiveness that we need to be very confident, were there to be the suggestion that it would be used as evidence, that its effectiveness as that sort of a tool would not be undermined by using it as evidence,” she told the Home Affairs Select Committee.

The group, chaired by Sir John Chilcot, a former Permanent Secretary at the Northern Ireland Office, has been asked to report during the next parliamentary session, which begins tomorrow.

The Home Office hopes that the group will complete its report by Christmas. Ms Smith and Gordon Brown are anxious to settle once and for all the question of whether to allow intercept evidence to be used in court before the publication of new counter-terrorism legislation this year.

In addition to Sir John, who served on the Butler Review on intelligence about weapons of mass destruction, the group includes Lord Hurd of Westwell, Lord Archer of Sandwell and Alan Beith, MP. David Cameron and Sir Menzies Campbell, then the leader of the Liberal Democrats, were consulted over the membership of the group.

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