Higher Education Minister Bill Rammell ordered an urgent review of university Islamic courses after claiming there was evidence that "narrow and unhelpful" interpretations of Islam were available to "many" young people.
He admitted there was worry at the highest levels of Government about the effect such teaching could have in the wake of last year's suicide bombings in London.
Mr Rammell's intervention comes after a report by an academic at Brunel University published last year claimed extremist groups, including the British National Party, had been found active at 24 universities.
The study has since come under sustained criticism but yesterday Mr Rammell demanded an improvement in the way Islam is taught at higher education level.
He said: "There are weaknesses in the way young Muslims are educated about what their faith really requires.
"There is a concern that the teachings which the great majority of Muslims would want to stress about living in peace, protecting the vulnerable, avoiding harm to others, are sometimes sidelined.
"There is reason to think that in some cases students are being exposed, more than any of us would like, to wrong-headed influences, under the name of religion.
"In particular, exposed to teachings that either explicitly condone terrorism, or foster a climate of opinion which is at least sympathetic to terrorists' motivation."
"I am worried about this, so are colleagues in Government, so above all are Muslims that I have spoken to."
Mr Rammell announced a review of Islamic education at universities by a leading scholar, Dr Ataullah Siddiqui, who will be asked to make sure courses are not restricted to narrow interpretations of Islam.
He also hit out at religious pressure groups who demand that colleges and universities cater for all their needs.
Some Muslim students have called for dedicated prayer rooms in university libraries and asked for lectures to be re-arranged around Friday prayers.
He said such unreasonable demands carried "big dangers" and called for an open debate on the issue.
Mr Rammell said: "The alternative is that we drift into a position where some British Muslims begin to feel aggrieved because their expectations are not being met and no-one is commenting that those expectations are not appropriate for today's society.
"Pockets of discontent emerge, impressionable young people become vulnerable to extremists and Muslims become less integrated and more isolated."
Ruth Kelly, the then Education Secretary, first warned universities last year that their historic role as bastions of free speech had to be reviewed in the light of the London bomb attacks and they should root out extremism on campus.
Vice-chancellors were told universities must "identify and confront unacceptable behaviour on their premises and within their community" and inform the police "where there may be concerns about possible criminal acts".
Ms Kelly said freedom of speech "does not mean tolerance of unacceptable behaviour".
A study published last year by the Social Affairs Unit think tank claimed "extreme and extremist groupings are making efforts to recruit previously unaligned students at universities and colleges to their cause, recognising the fact that mass higher education in Britain offers easy pickings."
University vice-chancellors and student groups have since criticised the study's research methods and conclusions