The New York Times on Friday said the president authorised the National Security Agency (NSA) in 2002 to monitor international telephone calls and e-mails of hundreds, perhaps thousands, of people inside the US without getting warrants previously required for internal spying.
At any given time since the order, the NSA monitored 500 people in the US, the report said.
It was also spying on 5,000 to 7,000 people overseas suspected of having terrorist ties, the paper reported.
In his first public reaction to the controversy Mr Bush told PBS television: "We do not discuss ongoing intelligence operations to protect the country."
"We don't talk about sources and methods, don't talk about ongoing intelligence operations," he said. "The reason why is that there's an enemy that lurks, that would like to know exactly what we're trying to do to stop them."
"I think the point that Americans really want to know is twofold. One, are we doing everything we can to protect the people? And two, are we protecting civil liberties as we do so? And my answer to both is yes, we are," he said.
Mr Bush’s aides have also declined to confirm or deny the report.
But the White House insisted that Mr Bush had always acted lawfully and protected civil liberties in his efforts to prevent a repeat of the September 11, 2001 terrorist strikes.
US Secretary of State Condoleezza Rice said she was "not going to comment on intelligence activities, because intelligence activities by their very nature are activities that are sensitive and that should not be compromised."
"The president of the United States acted lawfully in every step that he has taken to defend the American people and to defend them within his constitutional responsibility," Ms Rice told NBC television.
US officials told the New York Times that the program had disrupted terrorist plots, citing Ohio trucker Iyman Faris, who in 2003 pleaded guilty to supporting al-Qaeda by planning to destroy the Brooklyn Bridge in New York City.
"I'm not going to get into discussing intelligence activities relating to our nation's security and relating to our efforts to prevent attacks from happening," White House spokesman Scott McClellan said.
"After the attacks of September 11, the president made a commitment to do two important things: First, that he was going to do everything lawful within his power to protect the American people and save lives. Secondly, that he was going to remain fully committed to upholding our constitution and the civil liberties of the American people, and he has done both,” Mr McClellan said.
The top-secret NSA, whose chief mission is to intercept and analyse foreign communications, still gets court warrants to monitor communications taking place entirely within the US, the Times said.
"Eavesdropping on conversations of US citizens and others in the United States without a court order and without complying with the procedures of the Foreign Intelligence Surveillance Act is both illegal and unconstitutional," said Caroline Fredrickson, director of the American Civil Liberties Union's Washington office.
Some prominent lawmakers from both parties have expressed unease about the report.
"We need to look into that," Republican Senator John McCain said after an Iraq briefing at the White House. "Theoretically, I, obviously, wouldn't like it."
"Of course I was concerned about the story, but that's all I know," said Democratic Senator Joseph Lieberman, who said he would seek to "find out more about it."
Some officials familiar with the ongoing spying operation have questioned whether the surveillance has crossed constitutional limits on legal searches, the Times said.
Anti-terror law blocked
Meanwhile, the US administration's "war on terror" came under increasing assault on Friday as Congress blocked its main anti-terror law.
The Senate blocked the renewal of anti-terrorism legislation rushed through after the September 11, 2001 attacks which has been strongly criticised by rights groups.
Some Republicans sided with Democrats in holding up the measure.
The Republican majority failed to get the 60 votes necessary to end debate on the controversial USA Patriot Act, for which key measures expire at the end of the month.
Mr Bush has strongly lobbied for the renewal of the anti-terrorist measures, which include the right to see individual's library reading records have already been passed by the House of Representatives.
Rights groups say the act gives the authorities too much power to intrude into the private lives of US citizens.
The knock back came one day after President Bush was forced to back down and accept a ban on torture.