The Press Complaints Commission has published new recommendations in response to the royal phone tapping controversy.
The PCC began an inquiry after News of the World reporter Clive Goodman was jailed for illegally accessing voicemail messages on phones belonging to members of the royal household.
It has issued six recommendations for newspapers and magazines in a bid to prevent such a scandal happening again.
Contractual compliance with the Code of Practice should become universal across the industry, the PCC said.
Publications must ensure their journalists understand "subterfuge protocol" and there should be regular internal training regarding privacy cases and compliance with the law.
Newspapers and magazines should include reference to the Data Protection Act in contracts of employment, while contracts with external contributors should contain an explicit requirement to abide by the Code of Practice.
And there should be rigorous audit controls for cash payments to external contributors.
The final recommendation follows the revelation that former footballer Glenn Mulcaire, also jailed for his role in the phone tapping scandal, received over £12,000 in secret payments from Goodman, in addition to the £105,000 he was paid by the News of the World as a retainer.
The newspaper's editor, Andy Coulson, resigned as a result of the case.
The PCC said the actions of Goodman and Mulcaire were "deplorable" and "highly regrettable".
"Undercover investigative work has an honourable tradition and plays a vital role in exposing wrongdoing. It is part of an open society. But it risks being devalued if its use cannot be justified in the public interest," its report said.
The PCC said it was satisfied that no-one else at the News of the World knew that Goodman and Mulcaire were tapping phone messages.
It praised new editor Colin Myler for introducing a series of measures aimed at preventing such a case happening again.
The Information Commissioner has said that the penalty for a journalist who breaches the Data Protection Act should be increased to two years' imprisonment.
But the PCC said the industry should guard against "overreaction" and urged the Government to exercise caution.
"It is essential that the type of snooping revealed by the phone message tapping incidents at the News of the World is not repeated at any other newspaper or magazine," the report concluded.
"But it is similarly important that the industry guards against overreaction. There is a legitimate place for the use of subterfuge when there are grounds in the public interest to use it and it is not possible to obtain information through other means.
"It would not be in the broader public interest for journalists to restrain themselves unnecessarily from using undercover means because of a false assumption that it is never acceptable."
The report went on: "The Commission believes very strongly that the impact of these initiatives should be assessed before the government proceeds with its proposals to increase the penalties for journalists who breach the Data Protection Act to two years in prison.
"Such a move would be difficult to reconcile with notions of press freedom."