A family who were wrongly suspected of lying on a school application form have discovered that their local council used anti-terrorism surveillance powers to spy on them.

The family, from Poole in Dorset, said they had been tailed for three weeks by council officials trying to establish whether they had given a false address in an attempt to get their three-year-old daughter a place at a heavily oversubscribed local nursery school, which their two older children had attended. The family had in fact done nothing wrong, and the investigation was eventually aborted.

Yesterday it emerged that Poole borough council had legitimately used the Regulation of Investigatory Powers Act to monitor the family. This involved keeping a detailed log of their movements for two weeks, following the mother's car as she took her three children to school each day and even watching the family home to ascertain their sleeping habits.

The Act, passed in 2000, was supposed to allow security agencies to combat terrorism.

The 39-year-old mother, a businesswoman who wished to remain anonymous, said: "I can't imagine a greater invasion of our privacy. I'm incensed that legislation designed to combat terrorism can be turned on a three-year-old. It was very creepy when we found out that people had been watching us and making notes. Councils should be protecting children, not spying on them."

The council defended its right to investigate families in a covert manner, saying it had used the law twice in the past year to successfully prove parents were lying about where they lived.