Western governments are facing a potent and ill-understood new threat from terrorists and hostile powers in the shape of cyber warfare, military and security experts have warned.

Network attacks, a British government report says, are "growing in seriousness and frequency". And in a timely reminder of the emphasis that states and corporations alike are placing on the problem, Google and the National Security Agency were this weekend said to be finalising details of a co-operative deal aimed at boosting the search engine's defences after it was hit by sophisticated hacking attacks.

The company has stated that it will pull out of its business operations in China where the targeted attacks on the accounts of human rights activists are supposed to have originated. But the risk is not confined to individuals. US and British officials say what is at stake goes far beyond attempted state censorship, with military infrastructure and financial markets becoming vulnerable.

To overcome that risk, the Green Paper just published by the British government has stated that part of the forthcoming Strategic Defence Review will focus on the risks posed by technology in enemy hands. At the moment, it is believed that insurgents with the right electronic capability could jam weapons systems and intercept classified communications during military missions.

"Cyber space, in particular, poses serious and complex challenges for UK security and for the armed forces' operations... Cyber attacks are already an important element of the security environment and are growing in seriousness and frequency," says the report.

"The most sophisticated threat is from established and capable states but cyber eliminates the importance of distance, is low cost and anonymous in nature, making it an important domain not just for hostile states, but terrorists and criminals." The result of losing a "technological edge", said the paper, would mean "operations would be more hazardous. Our casualty rates, in particular, could be expected to increase markedly."

The boon of the internet for those opposed to Western governments is not limited to opportunities for direct assaults. Internet chat rooms have now become regular meeting grounds for Islamist terrorism, with activities ranging from recruitment to planning attacks. At least part of the indoctrination of the "underpants bomber" Umar Farouk Abdulmutallab, who attempted to blow up transatlantic airliners, is believed to have taken place in cyberspace.