The Prime Minister is studying proposals for an overhaul of the fight against terror, including the creation of a department of counter-terrorism.

John Reid, the Home Secretary, is considering creating a Whitehall department focused solely on tackling all aspects of terrorism as part of a full review of Britain’s counter terror strategy.

Tony Blair will study the proposals over the Christmas recess as the Government prepares new anti-terror laws.

It is unlikely that new legislation will propose increasing the time that police can detain suspects to 90 days, as no evidence to support such a move has been presented to the Home Secretary.

Nor is it expected to allow phone-tap evidence to be used in trials. But the police may be given permission to question suspects after they have been charged with an offence.

Mr Reid’s review has ruled out merging MI5, the domestic intelligence service with prime responsibility for countering terror, and MI6, the secret intelligence service that operates overseas.

However, he has an “open mind” on the question of setting up a new Whitehall department to tackle terror. The proposal is a potentially radical option to change Britain’s counter-terror effort. Another option is for much greater co-ordination among existing Whitehall departments, the intelligence services and police to tackle terror.

The Prime Minister asked the Home Secretary to review counter-terrorist capacity after the alleged plot in August to blow up transatlantic aircraft. The two agreed that a “radical step change” was needed to ensure a co-ordinated approach to tackle terrorism.

Mr Reid told MPs on the Commons Home Affairs Select Committee yesterday that his review had been completed and sent to the Prime Minister. He said: “This is now a serious threat. It no longer is easily divided into foreign affairs, defence or domestic affairs. It therefore needs a seamless, integrated, driven, politically overseen counter-terrorism strategy which places at its heart the recognition that above all this is a battle for ideas and values.”

His remarks about a “seamless” government approach to terrorism are in line with the thinking of Gordon Brown, who has taken an increasing interest in the issue.

Mr Reid and Mr Brown have had conversations on the issue in recent weeks and there have been suggestions that Mr Reid may remain at the Home Office in a Brown government.

But the Chancellor is not keen on a new minister for terrorism or a new department. Instead, he believes that it is the job of the prime minister — as under Mr Blair — to take charge of the nation’s security in both domestic and international terms.

Advisers said last night that Mr Brown favoured a single security strategy and budget, for which the Chancellor and the Prime Minister would be responsible.

However, the budget would involve bringing together resources spent by a range of government departments, including the Foreign and Commonwealth Office, Ministry of Defence, Home Office, Communities and Education departments.

Meanwhile, hopes that Iran might be brought into talks on the future of Iraq were fading last night after Britain and America savagely attacked the “revisionist” Holocaust conference in Tehran.

Mr Blair said: “If you’re going to invite the former head of the Ku Klux Klan to a conference which disputes the millions of people who died in the Holocaust, then what further evidence do you need to have that this regime is extreme?”

The Prime Minister appeared to be holding out little hope of negotiations with Iran, as proposed by last week’s Baker-Hamilton report to the US Government, as he suggested that Iran’s recent behaviour appeared to be “deliberately unhelpful”.

Mr Blair recently hinted at possible engagement with Tehran and Damascus, but in recent weeks his advisers have been careful to draw a distinction between Iran and Syria. Mr Blair sent his own envoy to Syria for talks two months ago.

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