Chairman Simon Milton wrote to every council warning them that they risk being stripped of their powers by the government if they use them to tackle lesser offences such as littering or dog fouling.
He said recent publicity claiming that "town hall snoopers" were using legislation primarily intended to catch terrorists and serious criminals was damaging.
"Our advice is that, save in the most unusual and extreme of circumstances, it is inappropriate to use these powers for trivial matters," he wrote in a letter to every council leader in England.
Councils must urgently review their use of the Regulation of Investigatory Powers Act - branded a "snoopers' charter" by critics - to ensure it is reserved for serious cases, he said.
The act gives officials the power to use covert surveillance and check phone or email records.
Newspapers have reported that the act has been used to monitor dog walkers, under-age smokers and a family wrongly suspected of abusing school catchment area rules.
Milton said it should be reserved for things like fly-tipping, rogue trading and council tax or housing fraud.
The powers should only be used after "careful consideration" by senior councillors and council managers, he said.
"By their nature, surveillance powers are never to be used lightly," he said. "It is important that councils don't lose the power to use them when appropriate."
Former Shadow Home Secretary David Davis said the indiscriminate use of the powers was a "stark demonstration of how the surveillance society has got out of control".
Campaign group Privacy International said there was a "surveillance free-for-all" in local government, while rights group Liberty has called the act a "snoopers' charter".
"The law must be reformed to require sign-off by judges not self authorisation by overzealous bureaucrats," a Liberty spokesman told the Daily Telegraph.
