The Information Commissioner's Office (ICO) has ordered Southampton City Council to end a requirement that all taxi journey conversations are recorded, claiming it breaches the Data Protection Act.
The requirement has been in force since 2009, forcing taxi services in the area to record the conversations of drivers and passengers and install CCTV in an effort to clamp down on problems occurring on some journeys.
However, the ICO said the number of incidents where such measures proved justified was not high enough. It has given the Council until 1 November to adhere to the ruling.
Information commissioner Christopher Graham said while he understood the Council's desire to try and protect the public the use of CCTV and audio technology had "gone too far".
"It is only right that the privacy of drivers and passengers is respected. This is particularly important as many drivers will use their vehicles outside work," he said.
"While CCTV can be used in taxis, local authorities must be sensible about the extent to which they mandate its use, particularly when audio recording is involved."
The ICO has also issued a similar preliminary enforcement action to Oxford City Council which was considering similar measures to Southampton, forcing the Council to suspend its policy.
"We hope this action sends a clear message to local authorities that they must properly consider all the legal obligations on them before requiring the installation of CCTV or similar equipment and that audio recording should be very much the exception, rather than the rule," Graham added.
The Council said it believed the decision failed to take into account the protective measures included in the recording of taxi conversations and was considering legal action.
"Data is encrypted, kept very securely and only downloaded if there is a specific complaint against a driver or if the police request access in order to investigate an alleged offence," said Jacqui Rayment, deputy leader of Southampton City Council.
"When we received the preliminary enforcement notice in May the council responded to the information commissioner's concerns about privacy but these reassurances have not been take on board in this judgement."
If the Council presses ahead with a legal challenge it would join Brighton NHS Trust in fighting the ICO after it said it would fight a £325,000 fine issued in June.
Robot can assemble Ikea furniture in under 10 minutes - several hours less than the average human
Researchers claim to be one step closer to developing flexible screen televisions, tablets and phones
Thanks to the creation of an ultrafast, nanoscale transistor
The 'first demonstration' of a scalable method for manufacturing graphene
Lifted off on a SpaceX Falcon 9 rocket today following postponement on Monday