Campaigning charities are increasingly fearful of speaking out on behalf of vulnerable people because of the widespread use of gagging clauses in contracts and attacks by ministers on voluntary organisations' freedom of expression, an independent inquiry has found.

Although the coalition government has promised a bigger role for charities in providing public services as part of its "big society" project, it has become increasingly contemptuous of those provider organisations which also speak out against injustice and inequality, the inquiry says.

Its chairman, Sir Roger Singleton, a former chief executive of the children's charity Barnardo's, said the government must take action to uphold voluntary sector independence: "Without this we may see the voice of the vulnerable and marginalised being silenced, democracy being eroded and society impoverished."

Charities told the inquiry they felt increasingly unable to challenge policy or speak out on minority issues at national or local level because they feared losing contracts or influence. Many were self-censoring because they feared retribution from funders. "Overall, we suspect there is an increasing unwillingness to speak truth unto power," the report says.

Charities most likely to be affected were smaller organisations working with "unpopular" disadvantaged groups including former offenders, people with mental health needs, drug addicts, homeless people, asylum seekers, and victims of crime. These charities are most dependent on state funding and because they are disproportionately based in deprived areas, are most likely to be affected by public funding cuts.

Barnardo's, one of the UK's biggest and most powerful charities, which delivers a range of public services, admitted it not proceeded with a complaint against a local authority contractor because it feared that by doing so it risked losing other contracts.

The report says: "Self-censorship is increasing because of the chilling effect of funding cuts, particularly the fear of loss of funding, and loss of capacity because of the move to restrictive contract funding. Direct censorship is also occurring through 'gagging clauses' in government contracts."

The independence of the voluntary sector was being threatened by what the inquiry says is a growing belief in government and parts of the media that charities receiving public funding should not be allowed to campaign.

The report notes that the Department of Communities and Local Government in December advised local authorities to stop funding "fake charities" that "lobby and call for more state regulation and more state funding".

"It is right that charities should only pursue campaigning or political activities in support of their charitable purpose, but it is also important in that context to recognise their ability to protest and campaign is a key expression of the independence of charities," the report says. "Maintaining a diversity of voices, especially on behalf of the most disadvantaged in our society, is vital to a healthy democracy."

Speaking on BBC Radio 4's Today programme on Tuesday morning, the minister for civil society, Nick Hurd, said he did not recognise the picture painted by the report.

He subsequently tweeted: "Just bn on @BBCr4today w/ @civilexchange 2 discuss whether independence of charities is under threat. It is not."

Gareth Thomas, the shadow minister for civil society, said the report tallied with many conversations he had had with charities. "A climate of fear exists in some parts of the third sector," he said. "For the health of democracy it needs to be sorted as a matter of urgency."

• This article was amended on 25 January 2013 because the original referred to Barnardo's not proceeding with a complaint against a private contractor; a local authority contractor, it should have said.