The all-party Intelligence and Security Committee (ISC) warned that MI5, MI6 and GCHQ were increasingly focused on counter-terrorism at the expense of other activities.

But Home Secretary Jacqui Smith insisted that the agencies were given the funding needed to counter the "range of threats" facing the UK.

She also set out plans for greater transparency and accountability of the ISC, which was dubbed the Prime Minister's "poodle" by Labour former defence minister Peter Kilfoyle.

Ms Smith said spending on counter-terrorism will rise to £3.5 billion by 2010-11.

Opening debate on the committee's annual report, she said: "The ISC notes that the increased funding for the agencies over the next three years is commensurate with the increased threat that the UK faces and the requirements of the agencies to counter them.

"However, the committee also expresses concern that aspects of key intelligence and security work are suffering as a consequence of the focus on counter-terrorism priorities.

"I would like to take this opportunity to reassure the House that both government and the agencies remain very focused on the range of threats to the UK.

"Although the increase in agency funding was driven largely by the need to respond to the terrorist threat, we continue to resource capabilities to counter other threats effectively as well."

The ISC is made up of MPs and peers appointed by the Prime Minister and is responsible for overseeing the work of MI5, MI6 and GCHQ.