Home Secretary Jacqui Smith highlighted the danger posed by new technologies and failed states around the world as she published an updated counter-terror strategy.
The report - known as Contest Two - is the first unclassified document to contain a detailed account of UK officials' assessment of the underlying causes of the terrorist threat and its likely future direction.
It contains a stark warning about the likelihood of an attack involving a "dirty bomb".
The report says: "Contemporary terrorist organisations aspire to use chemical, biological, radiological and even nuclear weapons.
"Changing technology and the theft and smuggling of chemical, biological, radiological and nuclear and explosive (CBRNE) materials make this aspiration more realistic than it may have been in the recent past."
It also notes that terrorists have created new explosives and new ways of using them, and that technology developed in conflict zones is quickly shared around the world.
Ms Smith was asked whether there was a greater threat of a CBRNE attack than five years ago.
She replied: "There is the potential, given the international situation, what we believe to be the aspirations of some international terrorists, that it could be."
She outlined the underlying causes of the risk of terrorists using a CBRNE device.
"Failed states, conflict, technology - both in terms of the ability to use materials and the ability to learn about how materials are used - contribute to our concern about that as a threat, including what we know about what terrorists may have previously planned to do and may be planning to do," she said.
The report said the threat to the UK came primarily from four sources.
These are: the al-Qa'ida leadership, terrorist groups affiliated to al-Qa'ida, "self-starting" terror networks or lone individuals motivated by an al-Qa'ida-style ideology, and terrorist groups with their own identity and agenda following a broadly similar ideology to al-Qa'ida.
The document said al-Qa'ida itself was "likely to fragment" under international pressure, and might not survive in its current form.
But its ideology will outlive changes to its structure, possibly leading to greater threat to the UK from smaller "self-starting" organisations.
The report added: "Terrorist organisations will have access to new technology and may become capable of conducting more lethal operations."
The Contest strategy is divided into four strands - Prevent, Pursue, Protect and Prepare.
These cover preventing radicalisation of potential terror recruits, disrupting terror operations, reducing the vulnerability of the UK and ensuring the country is ready for the consequences of any attack.
Ms Smith called for the use of "civil challenge" to those who hold extremist viewpoints.
She cited the example of the Muslim activists who recently protested at a homecoming parade in Luton for British forces returning from Iraq.
She said: "The civil challenge means that, if people feel it appropriate to demonstrate against our troops coming home from defending this country abroad, we - as Government and others - will say in turn that we think that that's wrong.
"Not that they've broken the law - one of the things we're defending in this country is the right to free speech, but that isn't free speech that will go unhindered or unchallenged by either Government or, I think, the broader community."
But she ruled out a face-to-face meeting with the group, saying: "I'm not inviting them in for a meeting because I think they're wrong."
The report comes amid ongoing controversy over the possible collusion of British agencies in the alleged torture of Guantanamo Bay detainee Binyam Mohamed.
The document said the Government's stance on the issue was "uncompromising".
It added: "The Government opposes the use of torture in all its forms, and the Government has always and will continue to condemn the practice of 'extraordinary rendition'.
"UK agencies and police have not and will never engage in these practices."
Shadow home secretary Chris Grayling said: "The horrific recent events in Mumbai have highlighted the need for fresh thinking in counter-terrorism, and the whole community needs to be involved in tackling the danger.
"No part of the UK is free from threat and we know that terrorists want soft targets.
"We have argued strongly that the Government is not doing enough to tackle the problem of individuals and groups in the UK who are fostering the hatred and extremism that lies behind the terrorist threat. That really does have to change."
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