The new legislation, to be presented to parliament on Thursday, would enable the National Defence Radio Establishment (FRA) to tap all Internet and telephone communication in and out of Sweden.
Under current law, FRA, which cracked Nazi codes during World War II and was Sweden's ear on the Soviet Union during the Cold War, is only allowed to monitor military radio communications.
Defence Minister Mikael Odenberg insists that the new legislation is necessary in today's changed world, where communications are increasingly transmitted through fiberoptic cables and not through the ether.
"This is about collecting information for the country's foreign, security and defence policy and protecting Sweden from foreign threats," Odenberg told AFP.
"We want to be able to detect military threats at an early stage, and also map other foreign threats such as terrorism, IT (Internet technology) attacks or the spread of weapons of mass destruction ... as well as protect our troops involved in international operations," he said.
If adopted, the law would enter into force on July 1.
One of the fiercest critics of the proposed change is former justice minister Thomas Bodström.
"This is about giving permission to wiretap maybe millions of telephone calls, emails and text messages," he told the media after a draft of the bill was presented in January.
Unlike police, FRA would not be required to seek a court order to begin surveillance. A parliamentary committee on military intelligence affairs would however have to give the green light.
FRA would only be permitted to tap into communications through pattern analysis and key word searches, and would not be entitled to target specific individuals.
Among other critics are the Green and Left parties, as well as the Swedish intelligence agency Säpo.
Säpo's chief legal counsel Lars-Åke Johansson said the proposal was "completely foreign to our form of government".
"The government would have direct control over operations within areas that not even the police can follow since they are not criminal operations," he warned, adding that a broader mandate for military intelligence operations "may lead to drastic violations of personal integrity."
Another critic is Anne Ramberg, the head of the Swedish Bar Association.
"If the proposal is adopted, we are going to be among the most advanced in monitoring our citizens, the US included," she said.
Henrik von Sydow, a deputy from Odenberg's own Moderates Party, is also opposed to the proposal.
"We can't assume that those in power always mean well. It is risky to set up a system that can be used by another government, at another time, for completely other purposes than that for which it was intended," he said.
In a bid to soothe critics' fears, Thursday's proposal is expected to call for the creation within FRA of a special council to protect individuals' integrity.
Meanwhile, public opinion polls have presented varying results.
A poll commissioned by the governmental Swedish Integrity Protection Committee and published in January showed that four of five Swedes are in favour of increased surveillance of citizens, whether it be through wiretapping, DNA registers or surveillance cameras in public places.
But a Skop institute survey published in February also showed that 60 percent were opposed to authorities wiretapping all telephone and computer communication in and out of Sweden.
According to the National Post and Telecom Agency, the proposed surveillance would require an initial investment of between half a billion to a billion kronor, as well as
annual operating costs of 100 to 200 million kronor.
The bill would be footed by telecom operators, the agency said.
By AFP's Pia Ohlin