Pakistan President Pervez Musharraf will hold talks with Tony Blair today after angrily dismissing claims in an MoD report that his intelligence service supports al-Qa'ida and the Taliban.
The leaked report by the Defence Academy - an MoD thinktank - says the ISI indirectly backs terrorism by backing religious groups in Pakistan.
But the President insisted that the allegations were being made by people who did not understand "ground realities".
He told the BBC's Newsnight programme, which obtained the document: "These aspersions against ISI are by vested interests and by those who don't understand ground realities.
"I don't accept them at all and I reject them fully."
The paper states that Iraq has served as a "recruiting sergeant for extremists from across the Muslim world".
It is believed to have been written by a UK intelligence official with a military background, who interviewed figures in the Pakistan army and academics to prepare a briefing about the Islamic country and the global war on terror.
The paper adds: "The wars in Afghanistan and particularly Iraq have not gone well and are progressing slowly towards an as yet unspecified and uncertain result.
"Iraq has served to radicalise an already disillusioned youth and al-Qa'ida has given them the will, intent, purpose and ideology to act."
The document goes on to state: "British armed forces are effectively held hostage in Iraq following the failure of the deal being attempted by the Chief of Staff to extricate UK armed forces from Iraq on the basis of doing Afghanistan, and are now fighting and are arguably losing, or potentially losing, on two fronts."
ISI is supporting terrorism by secretly backing the coalition of religious parties in Pakistan known as the MNA, according to the report.
It says: "The Army's dual role in combating terrorism and at the same time promoting the MNA, and so indirectly supporting the Taliban through the ISI, is coming under closer and closer international scrutiny."
The British policy of supporting President Musharraf because he provides greater stability is flawed because Pakistan is "on the edge of chaos", the document insists.
It adds: "Indirectly Pakistan, through the ISI, has been supporting terrorism and extremism whether in London on 7/7 or in Afghanistan or Iraq."
The report proposes using military links between the British and Pakistan armies at a senior level to persuade President Musharraf to step down, accept free elections and persuade the army to dismantle the ISI.
The allegations are likely to add extra tension to the meeting between President Musharraf and the Prime Minister, which is due to take place at Chequers.
The Pakistan premier's visit to Britain follows a stay in America where he sparked controversy with a series of interviews to publicise his memoirs.
He claimed that the US threatened to bomb Pakistan "back to the Stone Age" if it did not co-operate against the Taliban in the wake of the 9/11 attacks.
He has also criticised British intelligence for delays in informing the Pakistan authorities that two of the bombers who carried out the July 7 attacks in London had visited his country just months earlier.
The President insisted last night he would not give in to pressure to disband the ISI.
"I reject it from anybody - MoD or anyone who tells me to dismantle ISI," he told Newsnight.
"ISI is a disciplined force, for 27 years they have been doing what the government has been telling them, they won the Cold War for the world."
He added "Breaking the back of al-Qa'ida would not have been possible if ISI was not doing an excellent job."
The President also criticised the UK for not doing enough to stop its own homegrown extremists.
The President said: "There's no doubt that the London (bombers) ... have some way or other come to Pakistan.
"But let us not absolve the United Kingdom from their responsibilities. Youngsters who are 25, 30 years old and who happen to come to Pakistan for a month or two months and you put the entire blame on these two months of visit to Pakistan and don't talk about the 27 years or whatever they are suffering in your country."
It is thought the leaked document was due to form the basis of further meetings to discuss policy towards Pakistan.
A Ministry of Defence spokesman said: "The academic research notes quoted in no way represent the views of either the MoD or the Government.
"To represent it as such is deeply irresponsible and the author is furious that his notes have been wilfully misrepresented in this manner.
"Indeed, he suspects that they have been released to the BBC precisely in the hope that they would cause damage to our relations with Pakistan.
"Pakistan is a key ally in our efforts to combat international terrorism and her security forces have made considerable sacrifices in tackling al-Qa'ida and the Taliban. We are working closely with Pakistan to tackle the root causes of terrorism and extremism."