Mr Clarke, a consistent critic of the invasion despite his party's officially supportive line on the issue, claimed that the Government's stated reasons for participating in the US-led assault were "bogus".
Speaking to members of the Foreign Press Association at Westminster, Mr Clarke warned that the decision to take a leading role in the invasion had made ordinary life more dangerous for the British people.
He said: "The disastrous decision to invade Iraq has made Britain a more dangerous place.
"The war did not create the danger of Islamic terrorism in this country, which had been growing internationally even before the tragedy of the attacks on 9/11.
"However, the decision by the UK Government to become the leading ally of President Bush in the Iraq debacle has made Britain one of the foremost targets for Islamic extremists.
"Personally, I would have accepted that increased risk as the price of going to war if I had believed that we were driven to go to war for a just cause and a British national interest that could be pursued in no other way.
"I reject the notion that fear of terrorist reprisals should ever deter a British Government from pursuing an honourable and necessary cause. I had previously supported every war embarked upon by a British Government of whatever party throughout my Parliamentary career.
"This was not such a case. The reasons given to Parliament for joining the invasion were bogus.
"Bush's real purpose, of installing quite quickly a pro-Western democracy in Baghdad with the support of a grateful liberated population, has proved to be a sad illusion.
"The dangers of the invasion providing recruits and impetus to terrorist extremists were clear before the war."
Mr Clarke stressed that he was not advocating an immediate withdrawal of British forces.
He said: "What has been done, has been done. The Prime Minister responsible has made himself accountable to the public in a General Election, which he won. What matters today is what we do now.
"I do not believe, as leftist critics of the war argue, that we should just pull the troops out. It would be immoral to walk away from the consequences of our actions leaving behind anarchy and civil war in Iraq.
"I share the late Robin Cook's suspicions that the Bush administration hope to pull out most of their troops in whatever way they can before next year's US mid-term elections. I hope that our cynicism is wrong. Disengagement from Iraq has to be part of a much larger and more sophisticated political programme than we are delivering at the moment."
Mr Clarke argued that Britain had to seek ways of resolving conflicts with the worldwide Islamic community.
He said: "The problem of our relationship with the Muslim community, both internationally and domestically, is now one of the major political problems that British governments are going to have to face for many years to come.
"There will be more terrorist outrages and more international crises before anyone can hope to resolve it. Having made one catastrophic error in putting our troops into Iraq, we must seek to avoid further mistakes at home and abroad."
He continued: "Of course, the political parties in Britain must seek to achieve a cross-party consensus on where we go now and the present political leaders are trying to do so. I see little sign yet, however, that the outline consensus that appears to be emerging is of adequate substance to match the threat.
"If the Prime Minister really believes it, he must be the only person left who thinks that the recent bombs in London had no connection at all with his policy in Iraq.
"The Government's response to every terrorist event is to propose new tougher anti-terrorist laws. I have always supported tough and exceptional laws against terrorism of every kind as I did when I was Home Secretary in the face of Irish terrorism.
"However, we do not lack anti-terrorist laws. I do not believe that the recent London bombs were the result of any deficiencies in our legal system."
Mr Clarke cautioned: "The Government is also now seeking to blame our problems on the behaviour of extremist preachers in our midst.
"I support the expulsion of some of these vile propagandists from this country so long as the courts can be satisfied of their guilt of the crimes they are charged with.
"I am very conscious of the offence that the extreme propaganda of the worst examples of radical imams can cause to the families of the innocent victims of the outrages that these people support and encourage.
"But the public and the media should not be persuaded by the spin from No 10 that 'mad mullahs' are the most important creators of the dangers we face. They are one of the symptoms of the problem rather than the cause of it. No amount of preaching in itself ever made any person turn to the barbaric practice of suicide bombing.
"They foment and support an extreme and fanatic sense of injustice and a crazed drive for revenge that takes root in the minds of a small number of young people for other reasons."
Mr Clarke argued: "No amount of military action, on however great a scale, nor tough legislation, of however draconian a nature, are in themselves going to make us safer or usher in a saner and more rational world.
"Constructive political responses are far more important. We found that out for ourselves in Northern Ireland.
"I marvel that Prime Minister Blair, who has such an excellent record of seeing through John Major's political initiative in Northern Ireland, should fail to make the same judgments on the problem of resolving our conflicts with the Muslim world."
Mr Clarke suggested that Mr Blair had been too quick to lend his backing to President Bush over Iraq.
"After September 11, 2001 our Government was quite right to pledge its support for President Bush's campaign against global terrorism, it would have been failing in its duty if it had not done so.
"Iraq was a diversion from the core task of the pursuit and destruction of al Qaida. Indeed, the failure to prepare properly for the aftermath of invasion has led to a horrifying expansion of terrorist activity in Iraq. We must not make such a mistake again."
Mr Clarke laid out four principles for responding to the threat of Islamic terrorism.
* The methods used to fight terrorists should neither undermine the fundamental belief in the rule of law nor give the terrorists new grievances to exploit.
* The political dimension is a critical part of the response.
* The whole democratic world must work together to counter the problem.
* The Government has to be honest with the British people about the nature and scale of the threat and the appropriate response.
On the first point, Mr Clarke cautioned against "instant legislation" as a response to the demand that "something must be done".
He said: "New laws after every terrorist atrocity can feed a sense of panic. They can also encourage the terrorists because if our response is an ever-more repressive set of laws, they will know that those laws are most likely to impact on communities from which they derive sympathy."
He added: "We must always strive to preserve the freedoms we seek to defend. You do not beat the enemies of freedom by taking freedom away."Reuse content