The use of cheap, miniature "everyman" drones needs to be banned by international treaties before such devices fall into the hands of private users including terrorists, the head of Google has said.

In an extended interview with the Guardian, Eric Schmidt, executive chairman of Google and an adviser to Barack Obama's presidential campaign, warned of the potential of new technology to "democratise the ability to fight war", and said drones could soon be used to harass and spy on neighbours.

"You're having a dispute with your neighbour," he hypothesised. "How would you feel if your neighbour went over and bought a commercial observation drone that they can launch from their back yard. It just flies over your house all day. How would you feel about it?"

Schmidt set out the trajectory of robotic warfare and considered whether it would be confined solely to national governments. "It's probable that robotics becomes a significant component of nation state warfare," he said.

"I'm not going to pass judgment on whether armies should exist, but I would prefer to not spread and democratise the ability to fight war to every single human being.

"It's got to be regulated. You just can't imagine that British people would allow this sort of thing, and I can't imagine American people would allow this sort of thing. It's one thing for governments, who have some legitimacy in what they're doing, but have other people doing it … It's not going to happen."

The US government's use of military drones has proven increasingly controversial, with drone strikes on American citizens the subject of a recent 12-hour Senate filibuster by the Republican senator Rand Paul. The Bureau of Investigative Journalism estimates that US drone strikes in Pakistan, Yemen and Somalia have been responsible for at least 2,772 deaths.

Schmidt's warnings on privacy in the robotic era notwithstanding, Google itself has been frequently criticised by privacy campaigners concerned about the company's huge reach and the extensive data collection used to power its multibillion-dollar advertising sales.

Challenged on these issues, Schmidt said Google was "super-sensitive" on privacy and had voluntarily kiboshed projects it thought could lead to privacy breaches. "Google is not a bunch of engineers who throw stuff over the wall," he said. "A classic example is that a team built a facial-recognition tool. It was just really good – state of the art at the time. We stopped that product for two reasons. One is that it turned out to be illegal in Europe and the second was that it was not a good product to offer in the US for the same reasons."

Schmidt, who said he was "literally in the room" when the decision was made to kill the product, said it had been a judgment call taken on Google's own initiative.

"Facial recognition, completely unmonitored, can be used for very bad things," he said. "It can be used for stalking, for example. You know, it's just we don't want to be part of that as a company. There are cases where facial recognition can be used, but they need to be fairly carefully boxed."

Schmidt also addressed the "transition fund", valued at between €50m and €60m (£33m- £39m), set up by Google after negotiations with the French government. The fund will support technologies to help French publishing companies that are suffering during the transition to digital to monetise their content.

Schmidt avoided the question of whether a similar fund could be established in the UK. "I'm sure we can talk about it," he said. "The reason I like this model is it's … I don't like the idea of randomly writing cheques to publishers in the old model, and I think it's a very good idea for Google to assist in the transformation of their business model from old to new."