DENVER, Dec. 14 -- The Denver police have gathered information on unsuspecting local activists since the 1950's, secretly storing what they learned on simple index cards in a huge cabinet at police headquarters.

When the cabinet filled up recently, the police thought they had an easy solution. For $45,000, they bought a powerful computer program from a company called Orion Scientific Systems. Information on 3,400 people and groups was transferred to software that stores, searches and categorizes the data.

Then the trouble began.

After the police decided to share the fruits of their surveillance with another local department, someone leaked a printout to an activist for social justice, who made the documents public. The mayor started an investigation. People lined up to obtain their files. Among those the police spied on were nuns, advocates for American Indians and church organizations.

To make matters worse, the software called many of the groups "criminal extremists."

"I wasn't threatened in any way by them watching," said Dr. Byron Plumley, who teaches religion and social values at Regis University in Denver, and discovered that the police had been keeping information about his activities against war. "But there's something different about having a file. If the police say, `Aha, he belongs to a criminal extremist organization,' who's going to know that it's the American Friends Service Committee, and we won the Nobel Peace Prize?"

The incident has highlighted some pitfalls of police intelligence software, which has been hailed widely as a major tool in the war against terrorism. One of Orion's newest clients, in fact, is the New York City Police Department, where 200 people in the intelligence division are being trained to use the program, according to city records and Orion officials.

The New York police, who paid $744,707 for an updated version known as Investigations III+, would not say just how they planned to use the system. But Eric Zidenberg, an Orion vice president, said, "They have been a sponge, ready to learn as much as they possibly can."

Beyond the issues of technology, though, the episode has prompted a debate in Denver over the merits of such intelligence gathering.

Many other big cities and the federal government imposed restrictions on police snooping after spying scandals decades ago. In some of those places, including New York, the authorities are now trying to remove the restraints. Denver has been in the unique position of debating post-Sept. 11 privacy and security in the heat of a spying scandal, and not everyone thinks the police should be restricted.

"I think it's imperative after 9/11 that the police department and security agencies have an obligation to track suspicious people, in order to keep the citizenry alive," said Councilman Ed Thomas, who argued against restrictions. In a City Council debate, Mr. Thomas waved a list of the dead at the World Trade Center to emphasize his point.

The Council nevertheless passed a resolution imposing restrictions on police intelligence.

"There is a role for intelligence gathering," said Mayor Wellington E. Webb, who has said he did not know that the police were spying on peaceful citizens in his 11 years in office. "There isn't a role for intelligence gathering on Catholic nuns."

The controversy began last March at a gathering place for Denver activists for a variety of causes, the Human Bean coffee shop. Stephen Nash, a local glazier, was attending a meeting of Amnesty International when, he said, the shop owner told him, "There was a salesman here earlier, and he left this for you."

The package contained printouts from the Denver Police Department's Orion software about Mr. Nash and his wife, Vicki. The unusual thing was that the file had come from nearby Golden, where police detectives looking into a vandalism incident during a protest had received information from Denver's intelligence files.

"We realized the police were actually spreading false information about us to other police departments -- that we were members of a `criminal extremist' organization," Mr. Nash said.

He took the documents to the American Civil Liberties Union and sued the Denver police, setting off a series of continuing disclosures about police spying dating back decades. Police officers have admitted in depositions that they made up rules for monitoring organizations, sometimes deciding to create files on people who merely spoke at rallies.

Policy guidelines that would have prevented spying on ordinary citizens not suspected of criminal wrongdoing sat in the desk of the captain who was head of the police intelligence bureau, never implemented, according to a deposition by Deputy Chief David Abrams.

Among those monitored by the police were Dr. Plumley and his wife, Shirley Whiteside, who ran a soup kitchen in Denver. Marge Taniwaki, who was interned with her parents in a Japanese-American camp in World War II, had a police file, as did her former husband, from whom she had long been divorced. His only connection, she said, was that he owned the car that she drove to a protest.

Sister Antonia Anthony, a 74-year-old nun who has taught destitute Indians in this country and Mexico, was monitored for her activities with a nonviolent group advocating for Indians in Chiapas, Mexico.

"In a democracy, people have to speak out against evil," said Sister Antonia. But, she added, discovering that the police had kept a file on her put fear in her mind. "I have to admit," she said, "I'm really cautious on the road now. You're already on a list, you're `known' to police."

Orion officials say they trained the police to use the program, but some officers say they had no training. Working under the direction of the Denver police intelligence bureau secretary, officers classified organizations like the American Friends Service Committee as "criminal extremist" groups, one of the choices offered in a pull-down menu by the software. Orion says the classification is no longer part of the program.

David Pontarelli, a detective in the intelligence bureau, defended the characterization, saying in a deposition, "They have been linked to activities that involved extremist activity, criminal activities." The police said that each officer had used his own judgment in characterizing a group and that it had often been labeled "criminal extremist" because it did not seem to fit any other choices.

In addition to their intelligence files, the police entered in the database the names of troubled, but unprosecuted, students in Denver schools, along with the names of those who obtained permits to carry concealed guns, and, inexplicably, people who had received honorariums from the Police Department.

Orion got its start two decades ago developing an analysis tool for the Defense Advanced Research Projects Agency, where a new office run by Adm. John Poindexter is developing controversial plans to gather vast amounts of personal information as a means to hunt terrorists.

With the Pentagon's approval, Orion says, it began selling a revamped version of its tool to law enforcement agencies in the early 1990's, with little success at first.

Then California state officials hired Orion to develop an easy-to-use database for identifying suspected gang members by their tattoos and other telltale signs. Now being used by 14 states, the system, GangNet, remains controversial in California, where youth advocates say the information fed into the database by law enforcement officials is riddled with wrong or outdated information that can lead officials to falsely believe someone belongs to a gang.

Orion's Investigations, now being used by 20 local law enforcement agencies, lets officials enter information about people, groups and incidents. The data can then be searched and linked, with charts that draw lines to illustrate interconnections.

The company's sales model on its Web site has a gripping new pitch: terrorism. The demo charts some of the known whereabouts of Mohamed Atta and other Sept. 11 hijackers, as well as several onetime terrorist suspects.

In Denver, a panel appointed by the mayor concluded that the police had failed to understand both the power and the pitfalls of the software. "I don't think they had a clue what the capacity of this was and what they were doing with it, honestly," said Jean Dubofsky, a former Colorado Supreme Court justice and member of the panel, which concluded that not one of the 3,400 police records could be legitimately retained.

Justice Dubofsky's panel recommended some strict guidelines for intelligence gathering, similar to those that the New York police have told a federal court they want removed. The guidelines have been adopted, but otherwise, the panel could find no real harm done, even in the misuse of the software program.

"This is the kind of program that could have been very helpful before Sept. 11," said Justice Dubofsky. "It's also a very powerful tool that can cause problems for people. If you're going to use it, you use it very carefully."