Dubbed the 'Pontins plan', the idea is to accomodate asylum-seekers in existing camps - civilian and military. They would be able to move freely within a secure perimeter fence until their cases were settled.
But Labour insists the proposal is 'absolutely crazy' and ministers have said it is 'costly and unworkable'. Instead, home secretary Jack Straw intends to press ahead with his own reforms of the asylum system.
He wants to increase the amount of aid given to people claiming they are being persecuted in their own countries to prevent them fleeing to Britain and other EU states.
Britain is to impose a cap on the number of people granted asylum as part of a government clampdown, according to The Observer (p1).
Home secretary Jack Straw has indicated he wants to introduce a 'quota' of refugees allowed to settle in Britain.
At present, 76,000 a year claim asylum, of whom 20,000 are allowed to remain.
In an interview with The Observer, Mr Straw revealed the plan for a ceiling above which people would be allowed to enter the country only in 'exceptional circumstances'. He refused to say when the cap would be enforced, but said it was a 'medium-term' ambition for the next Labour government.
'There is a limit on the number of applicant, however genuine, that you can take,' he said.
'You can argue about how many thousands it is, but it is a matter of thousands, not millions. However compassionate you feel about the consequences of civil war, most of those consequences have to be dealt with...where the conflict is taking place.'
Mr Straw said he wanted to set the limit in the 'low tens of thousands', a level that would be agreed with other EU states.
His plans were immediately attacked by refugee groups who said he risked breaching the United Nations convention on refugees which gives refugees the right to claim asylum in the country of their choice.