Britain's communications spy agency GCHQ and the US National Security Agency (NSA) intercepted and stored images from webcams used by millions of Yahoo users, the Guardian newspaper reported on Thursday.
GCHQ files leaked by former NSA contractor Edward Snowden reportedly revealed how the Optic Nerve programme collected still images of webcam chats regardless of whether individual users were suspects or not.
In one six-month period in 2008, the British spy agency collected webcam imagery from more than 1.8 million Yahoo user accounts around the world, the Guardian said.
Yahoo, which was apparently chosen because its webcam system was known to be used by GCHQ targets, expressed outrage at the reported surveillance.
"We were not aware of nor would we condone this reported activity," a spokeswoman for the US technology firm told AFP in an email statement.
"This report, if true, represents a whole new level of violation of our users' privacy that is completely unacceptable.
"We are committed to preserving our users' trust and security and continue our efforts to expand encryption across all of our services."
Leaked GCHQ documents from 2008 to 2010 explicitly refer to the surveillance programme, although the Guardian said later information suggests it was still active in 2012.
The data was used for experiments in automated facial recognition, as well as to monitor existing GCHQ targets and discover new ones, the British paper said.
The programme reportedly saved one image every five minutes from a webcam user's feed, partly to comply with human rights legislation and partly to cut down the sheer amount of data being collected.
GCHQ analysts were able to search the metadata, such as location and length of webcam chat, and they could view the actual images where the username was similar to a surveillance target.
The data collected, which was available to NSA analysts through routine information sharing, contained a significant amount of sexual content, the newspaper added.
It cited one document as saying: "It would appear that a surprising number of people use webcam conversations to show intimate parts of their body to the other person."
In a statement to the Guardian, GCHQ said all of its work was "carried out in accordance with a strict legal and policy framework which ensures that our activities are authorised, necessary and proportionate".