The home secretary, Theresa May, withdraws an extradition order to the United States for computer hacker Gary McKinnon ITN

The home secretary, Theresa May, defied the American authorities on Tuesday by halting the extradition of British computer hacker Gary McKinnon, a decision criticised by the US state department but welcomed with delight by campaigners and politicians across parties in the UK.

In a dramatic House of Commons statement, May told MPs she had taken the quasi-judicial decision on human rights grounds because of medical reports warning that McKinnon, 46, who has Asperger's syndrome and suffers from depressive illness, could kill himself if sent to stand trial in the US.

The irony that May's most popular decision as home secretary was taken because of the Human Rights Act, which she has pledged to scrap, was not lost on her critics. But in a promised overhaul of the extradition laws that accompanied the decision, May indicated that future home secretaries would be stripped of the very power that she had used to save the computer hacker.

McKinnon's mother, Janis Sharp, said May had been "incredibly brave" to "stand up" to the Americans. She said she was overwhelmed after the "emotional rollercoaster" the family had been through in the past 10 years.

McKinnon, from Wood Green, north London, could not speak when he first heard the decision but then cried and hugged his mother.

"He felt like he was a dead person," Sharp said. "He had no job, he didn't go on holiday … he felt worthless … Thank you, Theresa May, from the bottom of my heart – I always knew you had the strength and courage to do the right thing."

McKinnon's MP, David Burrowes, who had threatened to resign from the government if the extradition went ahead, said May had saved McKinnon's life: "Today is a victory for compassion and the keeping of pre-election promises."

McKinnon was first indicted by an American grand jury in November 2002 for hacking into US military computers, including the Pentagon and Nasa, from his north London bedroom while he was looking for UFOs. He could have faced a prison sentence of up 70 years under US law.

The extradition order against McKinnon has been withdrawn and it will now be for the director of public prosecutions to decide whether he should be prosecuted in Britain.

A spokeswoman for the state department, Victoria Nuland, said: "The United States is disappointed by the decision to deny Gary McKinnon's extradition to face long overdue justice in the United States. We are examining the details of the decision."

The US authorities have described McKinnon's actions as the "biggest military computer hack of all time". The Washington Post observed that the decision "could ignite tensions in an otherwise close transatlantic relationship", while the former White House counsel Douglas McNabb said the US attorney's office would be furious.

The decision, which is the first time an extradition has been halted under the 2003 US-UK treaty, prompted immediate delight from those who campaigned to prevent McKinnon's removal and politicians from all parties.

Nick Clegg said he wanted to pay tribute to Sharp's determination to speak up for her son over 10 years. "I've long argued that I think it would have been wrong to send someone as vulnerable as Gary McKinnon to the United States and also I'm delighted that the home secretary has set out some plans about how we rebalance the extradition arrangements between the UK and the USA," the Liberal Democrat leader said.

The only discordant note came from the former Labour home secretary Alan Johnson, who said the hacker's human rights case had been rejected by judges in 2009 and claimed May had made the decision "in her party's best interest; it is not in the best interests of the country". He disclosed that the US authorities had been prepared to allow McKinnon to serve his sentence in a British prison when Johnson rejected McKinnon's earlier appeals.

Other MPs and campaigners expressed the hope that May would now use her discretion to halt the extradition of British student Richard O'Dwyer, who is accused of infringing US copyright laws. "Home secretaries have to make these decisions," said Keith Vaz, the chairman of the Commons home affairs select committee. "We cannot hand all the decisions to the judges to make on our behalf."

The home secretary told MPs that the treaty, which has been criticised as "lop-sided", was "broadly sound". But she made an important concession to critics, announcing that a "forum bar" would be introduced.

This will give a British court the power to bar prosecution overseas if it believes it will be fairer for the accused to face a British trial. This change may, however, take some time to come into effect as, rather than implementing an existing clause in the 2003 Extradition Act, May will introduce fresh legislation to overcome problems of delay and possible "satellite litigation".

She confirmed to MPs her intention to scrap the home secretary's discretion under the Human Rights Act that enabled her to prevent McKinnon's extradition. "Matters such as representations on human rights grounds should, in future, be considered by the high court rather than the home secretary.

This change, which will significantly reduce delays in certain cases, will require primary legislation."

She opened the door for more wide-ranging reform of the extradition process to reduce delays of up to 14 years by looking again at the provision of legal aid for terror suspects in national security cases and introducing a permission stage for appeals to UK courts.

The former Lib Dem leader Sir Menzies Campbell told May the treaty still needed reform, in particular the standard of proof required. He hoped that no British citizen would be sent to the US unless there was "probable cause".

The Liberty director, Shami Chakrabarti, welcomed the McKinnon decision. "This is a great day for rights, freedoms and justice in the United Kingdom," she said. "The home secretary has spared this vulnerable man the cruelty of being sent to the US and accepted Liberty's longstanding argument for change to our rotten extradition laws."

But the family of Babar Ahmad, who along with Talha Ahsan was deported two weeks ago to the US on terrorism charges, accused the legal system of double standards. "We strongly welcome the decision not to extradite Gary McKinnon. We would not want his family to experience the pain and suffering we have all been enduring since Babar was extradited," they said.

"However, questions do need to be asked as to why, within two weeks, a British citizen with Asperger's accused of computer-related activity is not extradited, while two other British citizens, one with Asperger's, engaged in computer-related activity are extradited. A clear demonstration of double standards."