When the cameras appeared above the rooftops in the Birmingham suburbs, some people realised they were mostly automatic number plate reading (ANPR) cameras, used to track drivers' movements. Protesters sprayed the camera posts with messages such as "1984 Big Brother" and "You are now entering a police state."

Those suspicious enough to ask what the cameras were for were given the impression they were part of a Home Office initiative to tackle vehicle crime on the Stratford Road corridor, an arterial route into the city.

For the vast majority of people on the bustling streets of Washwood Heath and Sparkbrook, two of the city's predominantly Muslim areas, the cameras were inconspicuous, melting into pavements filled with fruit stalls and fabric shops.

But an investigation by the Guardian has established that the surveillance cameras are the first of a kind in the UK.

While they may be used for ordinary crime fighting, they were put up to monitor extremists that the police and MI5 know to be living among the city's Muslim population.

The cameras appeared at 81 sites without consultation, after being requested by West Midlands police counterterrorism unit more than two years ago. They include around 150 ANPR cameras, 40 of which have been classified as "covert", and are thought to be concealed in walls and trees by the side of the road.

Birmingham city centre is covered by just 50 ANPR cameras. Washwood Heath and Sparkbrook have also been given an additional 60 standard CCTV cameras.

A total £3m to pay for the initiative, codenamed Project Champion, was channelled from the Terrorism and Allied Matters (Tam) fund, administered by the Association of Chief Police Officers. The criteria for Tam funds say a police force must prove that a project will "deter or prevent terrorism or help to prosecute those responsible". Tam money has previously been released to pay for ANPR camera projects across England and Wales. But police sources have confirmed that all other ANPR projects to receive the funds monitor "iconic sites" – potential terrorism targets – rather than communities considered to be at risk of extremism.

The cameras form "rings of steel" that ensure no one can enter or leave Washwood Heath or Sparkbrook in a vehicle without being tracked.

Documents reveal that a smaller number of cameras installed in neighbouring wards, such as Kings Heath and Moseley, are designed to cover "rat runs" into Washwood Heath and Sparkbrook.

When the system goes live in the coming weeks, every car journey in the area will be monitored, with data transferred to a database known as BOF2, located in a building in Stechford. Details of journeys will be stored for two years at the national ANPR data centre in Hendon, north London.

Project Champion has been developed behind closed doors for more than two years. It can be traced back to its formal adoption at a meeting of West Midlands police authority in February 2008, after a subsection of the Local Government Act was invoked to exclude members of the public from discussions. By then, senior officers at West Midlands police had already been in discussion with national terrorism chiefs about the programme.

The public face of the scheme became the Safer Birmingham Partnership (SBP), a body that bridges the police and the local authority.

It was not until more than a year later, in April 2009, that some of the councillors in wards where the cameras would appear were briefed at a meeting at police headquarters. All eight councillors who have cameras in their ward complain they were given insufficient, if any, information.

Councillors present said they were given the impression that the initiative was aimed at combating drug-dealing, antisocial behaviour and crime, and that their areas had been chosen because they had high crime rates. Terrorism, they say, was mentioned only as an aside, as part of a range of crimes the scheme could address.

One Respect councillor, Mohammed Ishtiaq, said they had been "100% misled" about the cameras, and were not told they would appear on side streets.

Tanveer Choudhry, a Liberal Democrat councillor for the Springfield ward, said he received "misleading information" from a council employee.

"We were not told where the cameras would go – the areas – or what they would be used for," he said.

He added: "I have had a lot of people who are very concerned. The community feels like it is being victimised. The message is, if you live in a predominantly Muslim area, you're a suspected terrorist."

Other councillors said they only became aware of the scheme when contract workers started digging up the pavement. They said the cameras threatened the trust between the Muslim community and police.

Briefing documents given to councillors made only fleeting references to counterterrorism, and in parts sought to play down its importance. The only reference in one four-page document comes in a single paragraph, which states that an added advantage of the cameras is that they will "provide support and reassurance to communities considered to be vulnerable to violent extremism". Another document has a sub-heading: "Has this got anything to do with preventing acts of terrorism?" It states in response: "This is not the focus of the operation. The cameras will be used to tackle all types of crime."

Inspector Kevin Borg, the liaison officer for SBP who briefed locals about the project, said it was regretted that not all councillors were informed, but maintained that some were told last year the cameras would be used for a "whole range" of crime prevention, including counterterrorism.

"It was badged as Home Office money," he said. "Terrorism and allied matters was not mentioned at that stage. I just don't think it was a detail that needed to be discussed at that stage."

He said he and the director of the SBP, Jackie Russell, who is in overall charge of the scheme, only discovered themselves that the cameras were installed as part of a counterterrorism initiative less than two months ago.

Russell said that in hindsight there should have been consultation with the public, but denied she had been deliberately misled by the police about the funding arrangement. "It wasn't hidden from me, it wasn't something I asked about. For me it was just Home Office money … I know what I was part of and I was in no way designing to deceive people."

She and Borg said that while the counterterrorism funding may be a concern to some, most people in Washwood Heath and Sparkbrook would welcome the fact the cameras could also alleviate crime and antisocial behaviour.

Colin Holder, who runs CCTV and ANPR for West Midlands police, said: "I've always known where the funding has come from. As far as I am aware, there was no intention to hide that from anyone."