The technology used by Britain's spy agencies to conduct mass surveillance is "out of control", raising fears about the erosion of civil liberties at a time of diminished trust in the intelligence services, according to the former Liberal Democrat leader Lord Ashdown.

The peer said it was time for a high-level inquiry to address fundamental questions about privacy in the 21st century, and railed against "lazy politicians" who frighten people into thinking "al-Qaida is about to jump out from behind every bush and therefore it is legitimate to forget about civil liberties". "Well it isn't," he added.

Ashdown talks frequently to the deputy prime minister, Nick Clegg, and is chair of the the Liberal Democrats' general election team. Though he said he was speaking for himself, his views are understood to be shared by other senior members of the Liberal Democrats in government, who are also keen for some kind of broad inquiry into the subject.

This idea is also supported by Sir David Omand, a former director of GCHQ. He told the Guardian he was in favour of an inquiry and thought it would be wrong to "dismiss the idea of a royal commission out of hand". It was important to balance the need for the agencies to have powerful capabilities, and the necessity of ensuring they did not use them in a way parliament had not intended, Omand added.

Ashdown is the latest senior politician to demand a review of the powers of Britain's intelligence agencies – GCHQ, MI5 and MI6 – and the laws and oversight which underpin their activities.

In an interview with the Guardian, Ashdown said surveillance should only be conducted against specific targets when there was evidence against them. Dragnet surveillance was unacceptable, he added.

Ashdown made clear revelations in the Guardian about GCHQ and its American counterpart, the National Security Agency, had raised important issues that "could not be ignored or swept aside in a barrage of insults".

He also criticised the Labour party, which was in power when the agencies began testing and building many of their most powerful surveillance capabilities. Labour's former home secretary Jack Straw was responsible for introducing the Regulation of Investigatory Power Act 2000 (Ripa), which made the programmes legal.

"Ripa was a disgraceful piece of legislation," Ashdown said. "Nobody put any thought into it. Labour just took the words they were given by the intelligence agencies. I don't blame the intelligence agencies.

"We charge them with the very serious business of keeping us secure and of course they want to have powers. But it's the duty of government to ensure those powers don't destroy our liberties and Labour utterly failed to do this."

One consequence of Labour's negligence was the development of surveillance techniques that could damage civil liberties and erode privacy, said Ashdown.

He said that he was "frightened by the erosion of our liberties" and while accepting that there was a need to keep the nation safe it was the "habit of politicians who are lazy about the preservation of our liberties or don't mind seeing them destroyed, to play an old game.

"They tell frightened citizens: 'If you give me some of your liberties, I will make you safer'".

Ashdown said that as a young man in 1960s he was taken to a vast Post Office shed in central London where spies were steaming open letters. Recalling being met by "a deep fog of steam" after entering the room, he said that the place was "filled with diligent men and women, each with a boiling kettle on their desk, steaming open letters". It was appropriate for the state to intervene in the private communications of its citizens, but the peer added "only in cases where there is good evidence to believe the nation's security is being threatened, or arguably, when a really serious crime has been committed".

The former party leader said that intercepting communications needed to be "targeted on an individual and not classes of individuals or, as at the moment, the whole nation" and argued that ought to be sanctioned by a third-party, preferably by a judge, or if not a member of the cabinet.

Ashdown said he did not believe Britain's intelligence agencies were out of control, but he said the same was not true of technology.

"We need a proper inquiry to decide what liberties and privacies ought to be accorded in the new interconnected world, and what powers of intrusion ought to be given to the state. The old laws that applied in the age of the steaming kettle will no longer do. The old protections are no longer good enough," he said.

Ashdown said the Guardian's reporting of the NSA files had been "helpful because it had raised this important issue to the point where sensible people understand this inquiry is now necessary".

An inquiry also needed to be set in the context of people's privacy expectations, he added, noting: "People today seem more casual about their privacy than they used to be. They don't seem to mind when their privacy is breached when they use Google, Facebook and other social media."

He added that he hoped this had not "changed the public's attitude towards the state's power to intrude into their privacy" but argued this was the fundamental question that needed to be addressed.

Ashdown said he thought the agencies would welcome an inquiry too, saying that they "recognise the mechanisms are no longer sufficient" and he doubted whether such an exercise would be "inimical to the heads of the secret services".

The Lib Dem also dismissed the parliamentary Intelligence and Security Committee, chaired by Sir Malcolm Rifkind, which is supposed to scrutinise the agencies.

He said that it was an institution "wholly incapable of coping" with the new circumstances.

Although he was careful to be respectful of its Conservative chair, Ashdown argued that "we are no longer in the age when a grandee's emollient words are enough to assure us that our liberties are safe" and concluded that the committee was "past its time".

Ashdown defended the Guardian's reporting of the issues over the last five months, and the paper's right to publish material that it deemed in the public interest.

He said: "I am not going to back every single thing the Guardian has done. But overall, in my view, the Guardian has done a very important in job exposing a really important issue that must now be properly considered."

But he also criticised Edward Snowden, the former NSA contractor who leaked files to the Guardian, the Washington Post and Der Spiegel.

"When Snowden first broke cover, I had quite a lot of admiration for him. Here was a whistleblower breaking surface on an issue that is certainly important. But I have to say that the way he has behaved since has diminished that admiration enormously. It seems to me this is becoming more about vanity."

Meanwhile, Omand said the ISC had to be given a chance to review the work of the agencies in an inquiry that it announced last month.

"Much now depends first upon the ISC and whether their latest inquiry can rise above the current clamour to a calm and dispassionate examination of the capabilities needed to keep our people safe and secure, and at the same time, how public confidence can be maintained that under no circumstances could these powerful capabilities be used in ways that parliament did not intend."