The firm sold more than 170,000 new cars in Britain alone last year.
Mercedes will not say how long it has used the sensors.
And it insists they are only activated in "extreme circumstances" — when finance customers have defaulted on their payments.
But it admits sharing car owner information and vehicle location details with third-party bailiffs and recovery firms who repossess the cars.
Ex-Cabinet minister David Davis today called for the Government to investigate.
He added: "This is not the first time big business has behaved like Big Brother — but it's rare to be quite as deceitful as this.
"I have to question whether it is even legal to pass on information to other people such as bailiffs.
"I would think the relevant minister ought to look very closely at the legality of this procedure."
Human rights group Liberty said Mercedes' actions were disturbing and part of the "creeping growth of surveillance".