However, Josh Silverman, Skype's president, said that in China TOM Online had to operate under the rules laid down by the Chinese government.
TOM online, he said, "just like any other communications company in China, has established procedures to meet local laws and regulations.
"What is clear is that TOM-Skype is engaging in extensive surveillance with seemingly little regard for the security and privacy of Skype users"
Citizen Lab report
"These regulations include the requirement to monitor and block instant messages containing certain words deemed 'offensive' by the Chinese authorities."
Silverman said that millions around the world using standard Skype software were not affected.
He said it was "common knowledge that censorship does exist in China and that the Chinese government has been monitoring communications in and out of the country for many years".
He said Skype had admitted in 2006 that TOM-Skype messages went through a text filter that blocked certain words in chat messages.
Unsuitable messages were to be "discarded and not displayed or transmitted anywhere", Silverman said.
He said it was not clear why TOM-Skype had changed the protocol to store those messages and users identities on its servers.
The Canadian group Citizen Lab, based at the University of Toronto, said the messages, with words such as "Tibet", "Communist Party" or "Democracy" triggered the monitoring software.
The stored messages also contained internet addresses, user names and other information which could make the senders and recipients easily identifiable.
|Messages related to Tibet are among those monitored [EPA]
Other sensitive subjects which triggered the key word monitor included Taiwan independence and messages related to the banned Falungong spiritual group.
In its report Citizen Lab said there was no evidence the captured data had been used by the Chinese authorities, but they questioned the extent to which TOM Online and Skype were cooperating with Chinese authorities in monitoring the communications of activists and dissidents as well as ordinary citizens.
"What is clear is that TOM-Skype is engaging in extensive surveillance with seemingly little regard for the security and privacy of Skype users," the group said.
In a statement on Friday Hong Kong-based TOM Group said that in order to do business on the mainland it was obliged to operate within Chinese laws.
"TOM Group reiterated that as a Chinese company, we adhere to rules and regulations in China where we operate our businesses," the statement released on Friday said.
The revelation makes Skype the latest US internet firm to become embroiled in controversy over its China operations.
Companies such as Microsoft, Google and Yahoo have all faced accusations of cooperating with the Chinese government to monitor dissident blogs and email communication.
Last year Jerry Yang, the Taiwan-born boss of Yahoo, faced stinging criticism in the US congress after his company handed over email correspondence that led to the jailing of a Chinese journalist.
Yahoo said in order to be able to do business in China it had to cooperate with Chinese laws.