In his first speech on radicalism and causes of terrorism, the Prime Minister said a "hands-off tolerance" of those who reject Western values had failed to prevent the rise of Islamic extremism in Britain.
He said Britain has "even tolerated these segregated communities behaving in ways that run counter to our values", a policy that needs to be revised.
Addressing a security conference in Germany, Cameron argued in favour of developing a stronger national and "muscular liberalism".
Decrying the long-standing policy of multiculturalism, Cameron also suggested that there should be greater scrutiny of Islamic groups that get public money but do little to tackle extremism.
"Let's properly judge these organisations: Do they believe in universal human rights - including for women and people of other faiths? Do they believe in democracy and the right of people to elect their own government? Do they encourage integration or separatism?" he said.
Cameron said what is needed is the strengthening of national identity and allowing people to say "I am a Muslim, I am a Hindu, I am a Christian, but I am a Londoner... too". "Frankly, we need a lot less of the passive tolerance of recent years and much more active, muscular liberalism," the prime minister said.
The comments did not go down well with Muslim groups, some of whom said the community had been singled out as part of the problem.
Reacting to the speech, Muslim Council of Britain's assistant secretary general Faisal Hanjra said the stance was a disappointment and signalled no positive change in the new government's approach to tackling the problem of extremism.
"We were hoping that with a new government, with a new coalition that there'd be a change in emphasis in terms of counter-terrorism and dealing with the problem," he said.
"Again it just seems the Muslim community is very much in the spotlight, being treated as part of the problem as opposed to part of the solution," Cameron was quoted as saying.
Calling for tough measures against groups that are seen as promoting extremism, Cameron said ministers should refuse to engage with such groups, they should be denied access to public funds and barred from spreading their message in universities and prisons.
He said under "doctrine of state multiculturalism," different cultures have been encouraged to live separate lives and "we have failed to provide a vision of society to which they feel they want to belong".
Britain is scrambling for ways to handle the problem of home-grown extremists, a phenomenon that is worrying the country for some years now.
Cameron said Britain should actively promote its ideals of democracy, equal rights and freedom of worship and speech and the establishment should make it clear enough to all its citizens that to belong in the country they would have to believe these things.
But, he also made a clear distinction between Islam and Islamic extremism, which he said attracted people who feel "rootless" within their own countries, BBC said.
"We need to be clear: Islamist extremism and Islam are not the same thing," he said.
Muslim youth group The Ramadhan Foundation too was disappointed with Cameron's statements, which it said suggested that the Muslim community is refusing to sign up to the values of tolerance, respect and freedom.
This suggestion, the group said, is deeply offensive and incorrect, and that Caemron had fed "hysteria and paranoia" by singling out Muslims.
"Multiculturalism is about understanding each other's faiths and cultures whilst being proud of our British citizenship," Chief executive Mohammed Shafiq said.