The home secretary, Jacqui Smith, yesterday denounced the consultancy firm involved in the development of the ID cards scheme for "completely unacceptable" practice after losing a memory stick containing the personal details of all of the 84,000 prisoners in England and Wales.

The memory stick contained unencrypted information from the electronic system for monitoring offenders through the criminal justice system, including information about 10,000 of the most persistent offenders.

Yesterday, Smith moved to distance the government from the data loss, the latest in a series of security breaches since the high-profile loss in November 2007 of two CDs containing child benefit details of 25 million individuals.

Smith said PA Consulting had broken the terms of its contract in downloading the highly sensitive data. She said: "It runs against the rules set down both for the holding of government data and set down by the external contractor and certainly set down in the contract that we had with the external contractor."

The Home Office said no more information was being passed to the firm while the investigation continued and the government was "reviewing the terms of that contract and other contracts with PA Consulting".

In the last four years PA Consulting has won government contracts worth at least £240m which include, from 2004, the involvement of the firm in the flagship ID cards scheme.

Jim Cousins, the Labour MP for Newcastle upon Tyne Central, who has asked most parliamentary questions about the firm, said: "I am shocked by the level of expenditure on consultants and even more shocked by the way the government seems to have become dependent on consultants for the delivery of core public services."

Opposition parties urged the government to reconsider its plan for the introduction of an ID card database following the incident. Dominic Grieve, the shadow home secretary, said: "The public will be alarmed that the government is happy to entrust their £20bn ID card project to the firm involved in this fiasco.

"This will destroy any confidence the public still have in this white elephant and reinforce why it could endanger - rather than strengthen - our security."

The Liberal Democrats were also not prepared to absolve the home secretary of responsibility. Their leader, Nick Clegg, accused Smith of being worse than the Keystone Cops at keeping data safe.

Clegg said: "Frankly the Keystone Cops would do a better job running the Home Office and keeping our data safe than this government, and if this government cannot keep the data of thousands of guilty people safe, why on earth should we give them the data of millions of innocent people in an ID card database?"

David Smith, deputy commissioner for the information commissioner's office, said: "The data loss by a Home Office contractor demonstrates that personal information can be a toxic liability if it is not handled properly , and reinforces the need for data protection to be taken seriously at all levels."

Home Office resource accounts for last year show that in March of this year two CDs containing the personal information of seasonal agricultural workers went missing in transit to the UK Borders Agency. The names, dates of birth, and passport numbers of 3,000 individuals were lost.