The European Union wants companies like Google and Facebook to give people more control over how their online habits are tracked, requirements that could hinder internet firms' ability to target advertising.
Internet companies, privacy activists and the EU's executive commission are likely to fight over the specifics of the rules, which cut to the heart of funding models not only for technology firms but also many online news sites and blogs.
"People should be able to give their informed consent to the processing of their personal data," the European Commission said in a new strategy paper unveiled today.
It also wants users to be able to modify and delete any information that has been collected, giving them "a right to be forgotten".
The strategy paper will form the basis for an overhaul of the EU's 15-year-old laws on data protection scheduled for next year.
It is open for public consultation until January and the Commission aims to propose legislation by mid-2011. Any new laws would have to be approved by the European Parliament and national governments.
Tracking an individual's search history to target online advertising is a key revenue source for companies such as Yahoo! and Google.
Other firms use cookies - small files placed on a user's computer - or pop-up windows to track the websites a user has visited in the past or the books and clothing he has bought online.
The more closely ads can be linked to a user's interests, the more likely they are to be successful.
But privacy watchdogs have raised concerns over whether this information can be linked to an individual's name or address, what it could be used for and how long it can be stored.
Technological advances and the many players involved in so-called behavioural advertising "make it difficult for an individual to know and understand if personal data is being collected, by whom, and for what purpose", the commission says in its strategy.
Websites should be more transparent about who is collecting data, and why, it adds.
However, the document does not say whether the EU intends to require users to specifically "opt in" to having their data collected, or whether it is enough to allow them to "opt out".
As it stand now, the Commission's strategy looks "ambitious," said Wim Nauwelaerts, a counsel at Brussels-based law firm Hunton & Williams who has advised several technology firms on privacy issues.
"The EU's data protection framework already had the reputation of being one of the most stringent out there," said Mr Nauwelaerts. "And this only reinforces it."
Google and its big rivals say they never link an individual's data to his name or address and that they do not collect information on sensitive issues such as health or sexual orientation.
However, privacy activists say recent breaches of companies' own policies show self-regulation is not enough.
Google has come under fire after vans collecting data for its StreetView application also scooped up sensitive information from unprotected wireless networks.
Facebook last month acknowledged that 10 of its most popular "apps" transmitted information about its users to advertisers and data-gathering firms.