Several Britons of Pakistani descent say they were abused in custody in Pakistan with British complicity. There have also been complaints of mistreatment from those held in the US prison at Guantanamo Bay, Cuba.
British authorities say they would never use, or encourage others to use, torture to gain information, but Cameron said something had to be done to restore Britain's moral standing.
"While there is no evidence that any British officer was directly engaged in the aftermath of 9/11, there are questions over the degree to which British officers were working with foreign security services who were treating detainees in ways they should not have," Cameron told parliament.
"We all believe it is time to clear up this matter once and for all." An independent inquiry, led by a judge and focused purely on British activities, is expected to begin work before the end of the year, once related criminal investigations and civil law suits have been dealt with.
Detainees have brought two criminal cases and 12 civil cases before British courts. Cameron said the government would mediate with, and possibly compensate, those who had made claims about their detention at Guantanamo Bay.
The inquiry, which will not be held entirely in public because some of the evidence likely to be requested is sensitive, will be led by Commissioner for the Intelligence Services and former appeal court judge Sir Peter Gibson.
Intelligence material and any testimony given by security service officers will remain secret.
"I am confident the inquiry will reach an authoritative view on the actions of the state and our services — and proper recommendations for the future," Cameron said.
Cameron, who heads a Conservative-Liberal Democrat coalition government formed in May, also wants to clarify how courts deal with intelligence information that security agents may need to disclose to defend themselves.
The previous Labour government lost a legal battle earlier this year to prevent the disclosure of US intelligence material relating to allegations of abuse by CIA agents.
Judges disclosed information given to Britain's domestic spy agency by the CIA that Binyam Mohamed, an Ethiopian citizen and UK resident who is fighting to prove he was tortured and that Britain knew about it, had been mistreated in US custody.
Cameron said there were now doubts about whether Britain's spies had the trust of their allies.
"This has strained some of our oldest and most important security partnerships in the world — in particular that with America," he said.
