LONDON, Feb 2 (Reuters) - MPs called on Tuesday for the creation of a National Security Committee to deal with counter-terrorism issues, citing concerns about "institutional inertia" in the present set-up.

A report by the Home Affairs Committee also said control orders - a type of house arrest which have formed a central plank of Britain's security measures in recent years - were no longer effective and should be scrapped.

Instead, it said, the government should immediately legislate to allow intercept evidence to be used in court to make it easier to convict suspects of terrorism offences.

Home Secretary Alan Johnson rejected the report's conclusions.

Committee chairman Keith Vaz said: "Too often in this inquiry we saw suggestions for reforms to the counter-terrorism structure rebuffed because 'it works well at the moment', or'the benefits are not yet proven.'" "We are very concerned that a degree of inertia has set in to the government's counter-terrorism planning and operations."

Last month, Britain raised its terrorism threat level to severe, the second-highest level, meaning an attack was highly likely but not imminent.

No reason was given, but the change was made before last week's major conferences in London to deal with militancy in Afghanistan and Yemen, and followed the failed Christmas Day attack on an airliner in Detroit.

Britain has been seen as a major target for al Qaeda since the Sept. 11 2001 attacks. Suicide bombings by four British Islamists in July 2005 killed 52 people on London's transport networks and a number of plots have been thwarted since then.

The committee said those currently involved in security planning were prepared to accept existing "sub-optimal"solutions, and it criticised the time it had taken to bring in new measures such as regional counter-terrorism police units.

It called for all existing counter-terrorism committees to be merged into a single National Security Committee chaired by the Home Secretary or Prime Minister and assisted by a"Condoleezza Rice-style" National Security Advisor.

The committee rejected the formation of a separate agency, akin to the U.S. Department of Homeland Security, saying it would not simplify command structures.

Home Secretary Johnson vigorously denied the committee's accusations.

"I totally refute the unsubstantiated and wholly inaccurate claims in this inadequate report," he said in a statement.

"The government fully understands the threat this country faces from international terrorism and has extremely effective systems and processes in place to deal with it."

Control Orders

The committee also said the legality of the control order regime was in serious doubt and it should be dropped. The MPs said it was "ridiculous" that prosecutors were not allowed to use intercept evidence which could help make the orders redundant.

On Monday, however, terrorism watchdog Lord Carlile gave his backing to control orders. He said they were "viable and necessary" and that abandoning the system entirely would damage security.

Last year, Britain's then top court ruled that the government had to disclose its case against suspects and that failure to do so breached the individuals' human rights.

In December, Home Secretary Alan Johnson ruled out using intercept information obtained from sources such as emails or phone taps arguing it would not be legally viable and could expose the methods of the security services.