James Bannon's comments come as the Metropolitan Police faces pressure due to the conduct of undercover police spying on the family of Stephen Lawrence.
Bannon says such covert operations should not be used against ordinary law-abiding civilians or run-of-the-mill demonstrators.
"Undercover policing is not an exact science and there really are few people who can do it well," Bannon, 48, told the Sunday Herald.
Bannon, who spent two years undercover investigating football hooligans, said that everyone "is now aware that undercover policing is a necessary way of policing".
"But it needs to be used as a last resort: it's hugely expensive and it comes at huge personal cost," he said.
"There are lots of other [policing] opportunities to be explored before you go down that route, and in my opinion it should only be used in the most extreme of circumstances: terrorism and very high-level criminality.
"I would argue that using it against demonstrators, and people who want to stop nuclear power stations being built, is probably not the way to go."
Bannon was a novice undercover police officer when, in April 1987, he and a colleague infiltrated Millwall FC's notorious hooligans, the Bushwhackers. Bannon's experiences were later made into the cult 1995 film, ID.
Last year, he published, Running with the Firm, in which he detailed his experiences with the Millwall fans. Despite only going on sale last August, it was the bestselling True Crime book of 2013.
James Bannon is appearing at the Tron Theatre as part of the Glasgow Comedy Festival show on March 19.