A nine-month inquiry by the Commons home affairs select committee concluded the internet is a “fertile breeding ground for terrorism” and plays a part in most, if not all, cases of violent radicalisation.
Internet service providers should be more active in monitoring sites and the government should work with them to develop a code of practice for removing material that could lead to radicalisation, the report said.
It comes as four radical Islamists will be sentenced this week for plotting a pre-Christmas terror attack on the London Stock Exchange after being inspired by the recently killed extremist Anwar al-Awlaki.
The inquiry found that the internet played a greater role in violent radicalisation than prisons, universities or places of worship, and “was now one of the few unregulated spaces where radicalisation is able to take place”.
But it added that a “sense of grievance” was key, and direct personal contact with radicals was a “significant factor”.
The government’s counter-terrorism strategy should show “the British state is not antithetical to Islam”, the committee said.
Keith Vaz, its chairman, said: “The conviction last week of four men from London and Cardiff radicalised over the internet, for a plot to bomb the London Stock Exchange and launch a Mumbai-style atrocity on the streets of London, shows that we cannot let our vigilance slip.
“More resources need to be directed to these threats and to preventing radicalisation through the internet and in private spaces. These are the fertile breeding grounds for terrorism.”
Mr Vaz went on: “The July 7 bombings in London, carried out by four men from West Yorkshire, were a powerful demonstration of the devastating and far-reaching impact of home-grown radicalisation.
“We remain concerned by the growing support for non-violent extremism and more extreme and violent forms of far-right ideology.”
He added that “a policy of engagement, not alienation” would prevent radicalisation and called for the government’s counter-radicalisation strategy Prevent to be renamed Engage.
The committee also called for better information-sharing between prison bosses, the police and the UK Border Agency (UKBA) following the release of prisoners who have been convicted of terror offences.
But although several convicted terrorists have attended prisons and universities, “there is seldom concrete evidence to confirm that this is where they were radicalised”, it added.
A Home Office spokesman said: “This is an interesting report and we will consider its findings.”
But Nick Pickles, director of civil liberties and privacy group Big Brother Watch, said: “Whatever the reason for blocking online content, it should be decided in court and not by unaccountable officials.
“There is a serious risk that this kind of censorship not only makes the internet less secure for law-abiding people, but drives underground the real threats and makes it harder to protect the public.”