More than 60 imams and leaders of Muslim organisations have signed an open letter to the government accusing it of criminalising Islam.
They said that the "terror threat" was being exploited for political capital ahead of the general election.
Signatories include journalist Yvonne Ridley, former Guantanamo detainee Moazzam Begg and members of the Islamist group Hizb ut-Tahrir.
The umbrella body, the Muslim Council of Britain, has not signed the letter.
The 61 signatories criticised the "demonisation of Muslims in Britain.... despite their disavowal of violence and never having supported terrorist acts".
The letter accused the government of trying to deflect attention from crises in the economy and health service, while trying to silence criticism of foreign policy.
'McCarthyite witch-hunt'
It condemned the exploitation of the "terror threat" for political capital as "the big parties inevitably try to outdo each other in their nastiness", in the run up to May's election by playing on public fears about security and immigration
The letter cited the targeting of Muslims through anti-terror legislation: "The latest Act of Parliament, the Counter-Terrorism and Security Act, threatens to create a 'McCarthyite' witch-hunt against Muslims, with nursery workers, schoolteachers and Universities expected to look out for signs of increased Islamic practice as signs of 'radicalisation'".
"Such a narrative will only further damage social cohesion as it incites suspicion and ill feeling in the broader community.
"The use of undefined and politically charged words like 'radicalisation' and 'extremism' is unacceptable as it criminalises legitimate political discourse and criticism of successive governments," the letter said.
Athar Ahmad, BBC Asian Network
The statement comes nearly a month after the government's Counter-Terrorism and Security Bill was passed, giving the authorities greater powers, including new temporary exclusion orders, to deal with those suspected of going to fight in Iraq or Syria.
It's laws like these which the list of more than 60 signatories say have resulted in a "witch-hunt" against Muslims living in the UK, a backlash against Muslim women and children and a negative depiction of the religion as whole.
The 2.7m Muslims who live in England and Wales belong to a range of different sects, denominations and Islamic schools of thought, making a single statement from the Muslim "community" a difficult task.
Those who have signed however, will be hoping their sentiments do not fall on deaf ears.
Signatories
As well as imams, the signatories include advocates, activists, community leaders, community organisations and student bodies.
Others giving their backing include Moazzam Begg, who is Director of Outreach for Cage, the advocacy group which had been in contact with Mohammed Emwazi, the man revealed to have been "Jihadi John".
Majid Freeman, was on an aid convoy with taxi driver Alan Henning in Syria when he was kidnapped, before the 47-year-old father of two was killed by Islamic State militants, also signed the document.
Others include journalists Lauren Booth and Yvonne Ridley. Ms Ridley is a Respect Party Activist and stood as a candidate in the Rotherham by-election in 2012. She was kidnapped by the Taliban in Afghanistan in 2001 and later converted to Islam.