Tensions between people of different ethnic groups and faiths in British society must be tackled, says Communities Secretary Ruth Kelly.
Segregation problems were blamed for 2001's Bradford riots
As she launched a Commission on Integration and Cohesion, she urged a "new and honest" debate on diversity.
The body, which will start work next month, will look at how communities in England tackle tensions and extremism.
But Ms Kelly says it will not look at whether faith schools are a good thing, insisting parents should have a choice.
The government plans to have more faiths schools but critics say they increase segregation between people of different beliefs.
The launch of the commission, which was originally mooted last July, comes amid growing fears of alienation, especially among young Muslims.
It will tour the UK before reporting next June, looking at how towns, cities and communities tackle challenges such as segregation and social or economic divisions between different ethnic groups.
The commission is designed to carry on some of the research that followed riots in northern towns in 2001.
Following that violence, experts warned the government some communities were leading "parallel lives" with little or no contact with each other.
Tensions and benefits
In a speech in London, Ms Kelly said the UK had moved away from an era of "uniform consensus" about multi-culturalism.
People were now questioning whether multi-culturalism instead encouraged separateness, she said.
Muslim leaders have said they need help in fighting radicalism
But the new debate had to be based on "fact, not myth".
Ms Kelly promised the commission would not be a "talking shop" and would not focus on tackling the ideology of a "perverted form of Islam" - something the government was examining in other ways.
Instead, it would look at building ways for people to get to know their neighbours and to stop people feeling a sense of "separateness".
Ms Kelly said northern English towns like Oldham had made significant progress in bringing people together since the 2001 riots.
Ruth Kelly met Muslim leaders last week
She said: "Multi-culturalism, different communities in Britain, the fact that Britain is open to people of all faiths and none, has been a huge strength of this country.
"But what we have to got to do is recognise that while there have been huge benefits, there are also tensions created.
"The point of the commission... is to try and examine how those tensions arise and what local communities can do on the ground practically to tackle those and make a difference."
Ms Kelly said she accepted there were "elements of the Muslim community that profoundly disagree with British foreign policy".
But she said foreign policy was not a "root cause" of extremism and could not be tailored for any one section of the community.
For the Conservatives Damian Green said: "There is a huge and vital challenge to be met in helping Britain's Muslim communities integrate fully with the rest of society.
"We hope that this latest government initiative has more substance than previous initiatives which have tended to grab a headline but then achieve very little in the long term."
Liberal Democrat home affairs spokesman Nick Clegg said the belated launch of the commission was welcome.
But he warned: "To be truly effective, any attempt to reach out to disaffected members of our Muslim communities must also incorporate an honest debate about this government's foreign policy and some of its counter-terrorism measures."
Operation Black Vote condemned what it called a new attack on multi-culturalism by Ms Kelly.
And it said she had failed to mention the underlying roots of inequality, discrimination and racism faced by many black and ethnic minority communities.
On faith schools, Ms Kelly said Church of England Schools were among the most "diverse" in the country.
And she said Muslim parents should not be denied the same opportunities offered to Christians and Jews in sending their children to faith schools.
But she did suggest faith schools could be encouraged to play sports matches against each other, or twin themselves with schools of a different faith.