The Provisional IRA's ceasefire means its members should regarded as freedom fighters to distinguish them from terrorist groups that refuse to enter a political process, Peter Mandelson said.
The former Northern Ireland secretary said that once a group had gone down the political path its members should no longer be seen in the same light as those linked to groups such as al-Qa'ida.
"I think the distinction we have to make is not between good and bad terrorists," Mr Mandelson told a Channel 4 programme about the 11 September attacks which is due to be broadcast tonight.
"It is between those terrorists who have political objectives and are prepared to negotiate those objectives at the end of the day and engage in some sort of dialogue and ultimately some sort of political or peace process.
"I don't call them terrorists when they reach that stage. They are resisters. They are freedom fighters, or whatever. They're like territorial, as opposed to international, terrorists. And it's what stage of development they're at, what attitude they have to politics, whether they're prepared to engage."
Asked whether this formula would lead him to categorise the Sinn Fein president, Gerry Adams, as a "freedom fighter", Mr Mandelson said: "I don't want to label Gerry Adams.
"But he is tied to the IRA, a terrorist organisation or a paramilitary organisation which is engaged in a ceasefire, which is committed to a peace process, whose political representatives take part in political institutions, and that's the difference."
The comments will be seen as further acceptance of Sinn Fein in mainstream British politics following the decision earlier this month to allow the party's MPs to set up offices at Westminster. That decision had been criticised by Quentin Davies, the shadow Northern Ireland Secretary.
Sinn Fein MPs have refused to take up their seats in Westminster since Gerry Adams was first elected as MP for Belfast West in 1983. They have stood as protest candidates, making it clear that they would not sit and vote as members of a "foreign parliament" and that they would not be prepared to take the oath of allegiance to the Queen which all MPs must take to draw a salary and sit and vote as full members of the House.
Last night, the Shadow Cabinet minister Theresa May said: "It is astonishing that any Labour MP, especially a former Northern Ireland secretary, could describe the IRA as anything other than a terrorist organisation."
Sinn Fein has been looking for greater recognition for its efforts in the peace process to appease rank and file members. Gerry Adams has admitted the Provisional IRA's decision in October to put weapons verifiably beyond use in the presence of independent decommissioning monitors had caused problems with the republican rank and file.
The suggestion from such a prominent British politician as Peter Mandelson that the Provisional IRA are freedom fighters will also help to restore Sinn Fein's reputation and much needed fund-raising capabilities in the United States, both of which had been badly dented in the post-11 September backlash against groups with links to terrorism.
A Labour Party spokesman said last night: "We are working with all political parties who are committed to the peace process." He could not comment on the opinions of an individual MP. The Northern Ireland Office said it would not comment until it had seen the programme.
The Year the World Changed will be broadcast on Channel 4 at 8pm today.Reuse content