Prof Les Iversen, chairman of the Advisory Council on the Misuse of Drugs, told MPs that criminalising teenagers for possessing small amounts of banned substances such as cannabis could stop them getting into university or buying a house later in life.
He recommended that they should instead have their driving licences confiscated or be sent on an awareness course, and claimed police are already taking this approach by giving out thousands of fines and warnings for cannabis possession.
But his suggestions to the Home Affairs Select Committee were swiftly dismissed by both the Home Office and Downing Street, risking a fresh row between Government and the advisory board.
In 2009 the then chairman of the group, Prof David Nutt, was sacked after claiming that horse-riding is more dangerous than taking Ecstasy, and then accusing ministers of "devaluing" scientific evidence on cannabis.
Prof Iversen told MPs on Tuesday: "What we would like to see is the discretion to divert from criminal penalties to civil penalties. Civil penalties could include obligatory education in drug education schemes, or other penalties such as losing your driving licence for a while. This is to some extent what the police are already doing.
"We would like to see less young people given criminal records because that has an impact on the rest of their lives in terms of getting a mortgage, getting a job, a college place etc."
He said that police could look at whether or not it was a first-time offence, and if the offender was a dealer, before deciding if they should be prosecuted or given a civil penalty.
In written evidence to the Committee, which is undertaking the first parliamentary inquiry into drugs policy for more than 10 years, the advisory board gave further detail of the "creative" ways offenders could be dealt with.
It said that regardless of their age or the type of drug they had been caught with, if it was only for personal use and they had not committed any other offences, they could be spared criminal records.
The board proposed "diversion" into education courses "similar to those for speeding drivers" or "temporary loss of a driving licence", and claimed this would help reduce the harm to society caused by drugs, reduce repeat offending and reduce the costs to the criminal justice system.
It insisted "this is not decriminalisation" and that the possession of drugs "should remain a criminal offence".
Official figures back up the claim that many more young people caught with small amounts of drugs are being dealt with out of court.
Last year in England and Wales, 5,949 under-18s were given cautions for drugs offences - which do not constitute a conviction but do appear on a criminal record - out of a total of 42,686 handed out to all ages.
This is greater than the 5,757 teenagers who were convicted at all courts for drugs crimes, of whom just 181 were sentenced to immediate custody.
In recent years police have also been able to issue "cannabis warnings" to adults found with the Class B drug for the first time, and gave out 79,700 in 2011. Those caught a second time can be handed a £80 fine, with 16,300 such penalty notices for cannabis possession last year. Again, these do not constitute convictions.
However senior Government figures were quick to distance themselves from Prof Iversen's suggestions.
Theresa May, the Home Secretary, told a Westminster lunch for journalists: "I have a very tough view on drugs. That view is informed by people I speak to who have seen the damage the drugs have done to people in their family.
"I think there are far too many people who think drugs is something you can do without it having an impact, but it does have an impact."
A Downing Street spokesman later said that David Cameron agreed with her stance, while other critics said that those who break the law must live with the consequences of their actions.
However Mrs May said she was looking at the advisory board's proposal for a new US-style law that would ban "legal highs" in general, removing the need to outlaw individual products months after they appear on the market.
Prof Nutt, the former chairman of the advisory board, told the select committee that although all drugs are harmful, alcohol is far more damaging to society than cannabis.
He blamed meddling by politicians for the absence of "sensible" regulation of drugs, and claimed that alcohol consumption would fall by 25 per cent if Dutch-style cannabis cafes were introduced to Britain.
Prof Nutt said police preferred people to be "stoned rather than drunk" and put the cost of policing cannabis used at £500million a year, compared with £6billion to deal with the disorder and violence linked to excessive drinking.