Privacy groups slam new rules
Privacy campaigners say the FTC's new principles change nothing
Privacy groups say widely-anticipated recommendations on how websites collect, save and share information about users don't protect the public.
The Federal Trade Commission's new policies focus on targeted advertising that tracks consumer behaviour online.
"The time for baby steps to protect online privacy is long passed, there need to be laws," said Jeff Chester of the Centre for Digital Democracy.
"Self-regulation simply hasn't worked," he said.
"The Commission is supposed to serve as the nation's leading consumer protection agency. But for too long it has buried its mandate in the 'digital' sand, as far as ensuring US consumer privacy is protected online.
"The FTC should have recommended that Congress enact legislation and give people control over what information is collected and how it is used," Mr Chester told the BBC.
"Day of reckoning"
For the last year the Commission has been looking at the issue of online marketing, which has grown into a $20bn (£13.6bn) a year industry by pitching adverts at consumers based on what websites they have visited.
In its 48-page Staff Report on Behavioural Advertising, the FTC expanded on the agency's guidelines for online marketers set out in 2007 and said it aimed to "encourage privacy protections while maintaining a competitive marketplace".
"Industry needs to do a better job" said Commissioner Leibowitz
The changes concern "transparency and consumer control, reasonable security and limited data retention, consumer consent for major changes to existing privacy policies and affirmative consumer consent for using sensitive data for behavioural advertising".
However two members of the FTC questioned whether the self-regulatory approach laid out in the new report will be effective.
"Industry needs to do a better job of meaningful, rigorous self-regulation or it will certainly invite legislation by Congress and a more regulatory approach by our Commission," Commissioner Jon Leibowitz wrote in a statement released with the report.
"A day of reckoning may be fast approaching," he warned.
"This staff report, while commendable, focuses too narrowly," said Commissioner Pamela Jones Harbour.
"Threats to consumer privacy abound, both online and offline, and behavioural advertising represents just one aspect of a multifaceted privacy conundrum surrounding data collection and use," she said.
The comments of both Commissioners were applauded by a series of privacy groups who all said the Commission had "dropped the ball" on the issue of protecting consumers.
"The FTC did a punt" on the question of sensitive information regarding health, finances or children claimed Pam Dixon the executive director of the World Privacy Forum.
Children and teenagers are seen as the most vulnerable group online
"Instead of specifically saying how this information should be treated, the FTC encouraged the industry, consumers and privacy advocates to develop more specific standards to address the issue.
"This area is very difficult and we were looking to the FTC to help set specific standards. The bottom line is that the FTC fell down on the job," said Ms Dixon.
On the FTC's issue of urging companies that provide online advertising to get users' consent before collecting general data, criticism came from Chris Hoofnagle the director of the Centre for Law and Technology at Berkeley University.
"The cumulative burden of having to opt out of every company using this approach means no consumer will. The opt out in this context is calculated to fail," he said.
"The report was a downer" when it comes to protecting children and teenagers online, said Corie Wright, a senior counsel with the Institute for Public Representation which filed comments to the FTC on behalf of children's advocacy groups.
"There are some populations, namely children and teenagers, that are so vulnerable that we should say 'hands off', don't target these groups. They are not sophisticated or cognitively able to make decisions in a meaningful way about their data.
"It's predatory to take their information and target them when they are not aware of what they are giving up," Ms Wright told BBC News.
The Commission, which awaits President Obama's appointment of a new chairman, was described by Mr Chester as "the last official act of the Bush administration".
In response to the FTC report, four of the major advertising trade organisations have agreed to step up efforts to maintain self-regulatory policies that were set over a year ago by the Federal Trade Commission.
Privacy groups worry about how much information people give away
The four bodies - the American Association of Advertising Agencies, the Association of National Advertisers, the Direct Marketing Association and the Interactive Advertising Bureau - have come together, they say, to "develop a cohesive and far-reaching self-regulatory effort for interactive advertising".
This is the first time the entire marketing and media industry has come together in such a way.
Meanwhile search giant Google said while it supports "federal consumer privacy legislation it backs the FTC in its latest recommendations".
"The FTC principles underscore that in a fast-evolving space like the Internet, a self-regulatory approach is the best way to protect consumers and promote innovation," said senior policy counsel Pablo Chavez.