MPs have urged the government to halt its latest contract with Palantir after the Guardian revealed that the US spy-tech company is to gain access to a trove of highly sensitive UK financial regulation data.

The Financial Conduct Authority, the watchdog for thousands of financial bodies from banks to hedge funds, has hired Palantir to apply its AI systems to two years’ worth of internal intelligence data to help it tackle financial crime.

But the Liberal Democrats on Monday called for a government investigation into the contract, which the party said could be “a huge error of judgment”, while the Green party said it should be blocked over Palantir’s links to Donald Trump.

Questioned on whether the UK was becoming “dangerously overreliant” on US tech companies including Palantir, Keir Starmer told parliament he would prefer to have more domestic capability but added: “I don’t think we’re overreliant.”

Palantir was founded by the Trump-backing billionaire Peter Thiel and it supports the US and Israeli militaries and the ICE immigration crackdown. In the UK it has built up more than £500m in contracts including with the NHS, police and Ministry of Defence.

Insiders at the FCA, where security-cleared Palantir staff are to gain access to FCA data in a 12-week trial, have questioned if there are sufficient safeguards to prevent its “data lake” from being exploited in unintended ways.

There are concerns about the potential for data about sensitive FCA investigations into high-profile figures to be accessed during Palantir’s work. These have recently included the banker Jes Staley, who was an associate of Jeffrey Epstein, and the hedge fund boss Crispin Odey. The FCA has insisted Palantir will be a “data processor”, not a “data controller”, meaning it could only act on instruction from the regulator.

The FCA said it would retain exclusive control over the encryption keys for the most sensitive files and the data would be hosted and stored solely in the UK. Palantir will have to destroy data after completion of the contract and any intellectual property derived from the data trawling should be retained by the FCA, it said.

One insider told the Guardian that the information so far available was “very lacking in details about how the obvious risks would be controlled or limited”.

Daisy Cooper, the Liberal Democrats’ Treasury spokesperson, called for a investigation into the FCA’s Palantir contract and said: “Palantir has spent years embedding itself within the Maga machine. Awarding a contract for sensitive UK financial data to a Trump-aligned tech giant seems like a huge error of judgment.”

The Green party MP Siân Berry said: “Companies like Palantir should have no place within UK government systems when they are closely involved in President Trump’s illegal wars.” She called for the government to “step in immediately and protect our national and economic security by blocking this contract award”.

Martin Wrigley, a Liberal Democrat member of the Commons technology committee, said the FCA deal should be “stopped before it’s started”. He said: “We are creating a single behemoth that our UK firms won’t be able to compete against. We should be developing our own industries.”

Palantir’s European boss, Louis Mosley, has recently sought meetings with MPs to address “misconceptions” about its technology. He denies claims Palantir may “use customer data for our own purposes” on the basis this is “something that we have no business interest in, and that we are legally and contractually prevented from doing”.

The official announcement of the FCA contract states Palantir will work across “all FCA datasets”, which insiders have said could include personal details, as well as some trading records of banks, hedge funds and pension funds where they relate to cases of potential wrongdoing.

Donald Campbell, the director of advocacy at Foxglove, a tech fairness campaign, called the contract “another worrying sign that Palantir is consolidating its hold over UK government services”.

He said: “Ministers urgently need to stop and think before handing yet more contracts to this Trump-supporting spy-tech giant. There is a serious risk of ‘lock-in’ – the more Palantir is enmeshed in the UK’s public services, the harder it may be to get them out.”

Palantir said it was proud its software was being used “to support the FCA in their vital work to tackle financial crime”. It said the “data cannot be commercialised in any way” and “the software can only be used – legally and contractually – to process data in strict accordance with the instructions of the customer”.

The FCA said the data in the trial would not include trading records and there was no risk of lock-in as it was just a trial. An FCA spokesperson said: “Criminals aren’t slow to use technology to cause harm – we need to stay ahead of them. We can run a trial to helps us do that while maintaining strict data controls.”

HM Treasury has been approached for comment.