The cabinet decision was welcomed by Congress leaders. But the Bharatiya Janata Party saw it as an attempt to target its prime ministerial candidate and Gujarat Chief Minister Narendra Modi.
The move came even as an Ahmedabad court rejected a plea from Zakia Jafri, widow of a slain Congress MP, against the clean chit given to Modi by a Special Investigation Team in a 2002 case of Gujarat riots.
The court order prompted BJP leader Arun Jaitley to claim that the "conspiracy" to implicate Modi had been exposed.
"The Congress and its sponsored NGOs are unable to fight Narendra Modi politically. They used falsehood in court against him but failed," Jaitley tweeted.
The commission of inquiry approved by the cabinet will look into the "physical/electronic surveillance" in Gujarat, Himachal Pradesh and Delhi "allegedly without authorisation", an official statement said.
A retired Supreme Court judge could head the inquiry and may be asked to submit a report in three months, said government sources.
The snooping issue came into focus after two investigative news portals -Cobrapost and Gulail - claimed last month that Shah ordered the illegal surveillance of a woman at the behest of a "saheb" -- widely believed to be Modi.
Recently, Gulail.com released a set of 39 new tapes, purportedly of telephonic conversations which, it said, showed that the alleged illegal surveillance of the architect occurred even beyond Gujarat.
Congress leader Digvijaya Singh, a bitter critic of Modi, welcomed the cabinet move: "Congratulations to central government. This should have happened earlier."
The Congress had earlier alleged that the woman was close to Modi and was put under surveillance by Shah in 2009, after Modi suspected he of being close to an IAS officer.
A group of women activists had approached President Pranab Mukherjee to seek a judicial probe into the alleged snooping.
No more a minister in Gujarat, whose government has already ordered a probe into the case, Shah is now in-charge of the BJP in Uttar Pradesh.
The BJP said Thursday that Modi was the real target of the investigation into the alleged snooping.
"The centre's decision to institute a fresh commission of inquiry into the alleged snooping case is an attempt to tarnish the image of the Gujarat government," BJP president Rajnath Singh said.
Added BJP spokesperson Nirmala Sitharaman: "The Congress is trying to hit at the principal opposition party's prime ministerial candidate. It is a clear case of political vindictiveness coming into play."
Jaitley called the cabinet decision "a step against the federal structure of our constitution. I am sure it will be legally challenged in courts".
Law and Communications Minister Kapil Sibal mocked at him.
"Ironically, those who wanted immediate action against individuals allegedly accessing their call detail records CDRs are opposing the snoopgate actions," Sibal tweeted, referring to a case when Jaitley's phone was allegedly tapped.
--IANS (Posted on 26-12-2013)