His warning came as Tony Blair was under renewed pressure yesterday to set a deadline for withdrawing troops in the wake of British forces' clashes with Iraqi police in Basra.
Mr Reid ruled out any reduction in troop strength and defended the decision to rescue two SAS soldiers, who had been arrested by Iraqi police. The arrest led to British forces coming under attack, with soldiers engulfed in flames from petrol bombs.
The Defence Secretary said the rise in violence was a direct result of the political progress: "You can measure the success of the politics by the ferocity of the terrorism. As the elections come up we will see more of this."
Yesterday, the office of the Iraqi Prime Minister, Ibrahim al-Jaafari, criticised the rescue, in which the wall of a police compound was flattened by a British armoured vehicle, as "a very unfortunate development". The Iraqi government launched an inquiry into the incident.
Critics seized on the events in Basra as evidence of the need for a defined exit strategy for British troops. The Liberal Democrat leader Charles Kennedy said: "The events of the past 24 hours confirm what many of us have worried now over many months - that Iraq is moving more in the direction of civil war."
Mr Kennedy said he had repeatedly urged the Prime Minister not to commit troops without a clear exit strategy. "Now, of course, as the situation tragically has got so much worse within Iraq itself, the need for that exit strategy - and for Parliament to be discussing properly and publicly that exit strategy - becomes even more essential."
The former international development secretary Clare Short, who resigned in protest over the war, said: "We should negotiate an end to the occupation. They are all saying 'no' because it's such a mess we cannot leave now. But the occupation is a problem now. The Association of Muslim Scholars has said that they would negotiate and call an end to the resistance if we set a date for a withdrawal. Unless we withdraw, it is going to get worse."
Alan Simpson, of the left-wing Campaign Group of Labour MPs, said: "The message is this: it is the time to go. It is a horrible mess, worse than Northern Ireland because no one pretends that this is our country. When you get army personnel dressed as Arabs armed with automatic weapons, everyone will see this as the role of agent provocateurs. It has just ripped our credibility into tatters. Tony Blair should bring an end to this chaos."
Mr Blair's spokesman said: "The strategy continues to work toward the creation of a fully democratic Iraq." Mr Reid maintained that the US-British coalition was still going "in the right direction" in Iraq in terms of overall strategy and the incident was merely "local" and did not involve a large number of people.
The British commander on the ground, Brigadier John Lorimer, said: "British armoured vehicles being attacked by a violent crowd, including petrol bombs, make graphic television viewing. But this was a small, unrepresentative crowd." It is believed that the two soldiers, members of SAS A Squadron, were investigating whether members of the Iraqi police force were involved in a spate of recent lethal attacks on British forces in southern Iraq. The police are thought to have been heavily infiltrated by Shia militiamen of the Army of Mehdi, led by the radical cleric Muqtada Sadr.
The two soldiers were arrested by the police after a firefight in which, according to the governor of Basra, Mohammed al-Waili, a policeman was shot dead. The Arab television network al-Jazeera broadcast footage which was said to show the contents of the car used by the two SAS men, including assault rifles and an anti-tank weapon.
Under an agreement between Iraqi authorities and coalition forces, the soldiers should have been handed back to the British Army. However, this did not happen after repeated requests and a delegation of six British military personnel were sent to obtain their release. The rescue attempt was carried out after the two SAS men were moved from a room where they were being held and handed over, it is believed, to members of the Army of Mehdi in an adjoining building within the station complex.
Haydar al-Abadi, a spokesman for Mr Jaafari, said the rescue was "a very unfortunate development. My understanding is that it happened very quickly. Second, there is a lack of discipline in the whole area regarding this matter."
However, some time later Mr Jaafari's office issued a statement saying: "In response to recent events in Basra, the Iraqi government wants to clarify there is no 'crisis' - as some media have claimed - between it and the British Government."
The questions raised in Basra
WHAT HAPPENED IN BASRA?
Two British SAS soldiers, apparently in Arab clothing and wearing wigs, were arrested while allegedly conducting a surveillance operation on Iraqi police.When challenged, the soldiers are believed to have fired on a police patrol, killing one officer. A British delegation was dispatched to the police station where they were being held to negotiate their release. Tensions rose after no progress was made, and British Army officials claim they had reason to believe the soldiers had been handed over to a local Islamic militia.
British forces then sent in two Warrior armoured vehicles to free the soldiers but they came under attack from a crowd throwing stones and petrol bombs. A larger force of 10 armoured vehicles, dozens of troops and helicopters was then dispatched and the prison was stormed. The soldiers were subsequently released by force from a nearby building, where it is claimed that they were in the custody of the militia. As that operation was under way a crowd hurled more petrol bombs and set British Warrior vehicles alight; at least two British soldiers were injured as they escaped the scene.
CAN THE IRAQI POLICE IN BASRA HOLD COALITION FORCES?
According to UK authorities, coalition forces detained by Iraqi authorities must be handed over to the US-led multinational force. The Defence Minister John Reid insisted that Iraq's interior minister had ordered the release of the two British soldiers - Baghdad authorities have not confirmed this - and that failure to comply with that order had prompted the military action.
WERE IRAQIS KILLED?
According to Iraqi authorities in Basra, at least two Iraqi civilians were killed in the clashes with British troops that accompanied the storming of the compound. British authorities have not confirmed any civilian deaths and said that three of their soldiers were lightly wounded.
DID PRISONERS ESCAPE?
Local police and Iraqi officials have said that an unspecified number fled as part of the Jamiat prison compound was demolished by British tanks.
IS FURTHER RETALIATION EXPECTED?
The action has stoked an already tense situation following the British capture of two leaders of the Shia Army of Mehdi, led by the radical cleric Muqtada Sadr. The arrests have prompted angry protest in Basra, where Sadr claims to have the loyalty of thousands of armed militiamen.
Should troops be pulled out?
Sir Malcolm Rifkind, Former Foreign Secretary
"Comparisons have been drawn with Northern Ireland. I disagree. In Northern Ireland, there was no doubt as to the moral authority of the armed forces in protecting British citizens in part of our own country. We have no moral authority for our presence in Iraq. The question is, having created a political vacuum there, can we provide a degree of protection until their own security forces can take over? If it became clear that help is neither wanted nor able to be delivered, the British and US governments would have to concludeit was time to leave. We are not at that stage today and, for the sake of the Iraqi people, I hope we don't reach it."
Clare Short, Labour MP, Former International Development Secretary
"Like others, I was horrified by the television film of a tank in flames in Basra. It was a reminder of the worst days of Northern Ireland. People will draw parallels with Vietnam. It is a horrible situation, but am afraid that it can only get worse. At least Harold Wilson, who didn't fall out with the Americans, didn't send troops to Vietnam, but it's Tony Blair who has got us there. I heard [the Defence Secretary] John Reid this morning saying it's one little incident, no big deal. But how fragile is the situation getting? Is it out of our control? Blair should set out a clear exit strategy, but it is time that Gordon Brown also set out his views."
Reg Keys, Father of Tom Keys, killed in Iraq on 24 June 2003, aged 20, serving with the Royal Military Police
"We should bring our troops home. Iraq is drifting into irretrievable civil war and we are losing control of the situation. Every day it seems to be getting worse. I never thought I would see the day when British soldiers were burning on the streets of Iraq. You cannot trust the Iraqi police, as my son found out when he was in a police station and 40 or 50 armed police fled to let him and his colleagues face the mob. Tom told me that you can't train the local police because they have no inherent discipline. They take their lead from tribal and religious leaders."
Paul Beaver, Defence Analyst
"If we leave now it would lead to civil war and the Arab media would paint it as some form of climb-down or capitulation. British forces should start leaving next year so that we are out by the end of 2006, but we mustn't repeat the shambles of the Spanish withdrawal, which was sudden and left everybody in the lurch. It could have been handled so differently if the US had accepted the British proposal of taking the Iraqi army and police on our side and re-leadering them.But I believe Iraq is a sideshow to what is happening in Afghanistan, which is the real theatre of global terrorism."
Colonel Tim Collins, Former commanding officer, The 1st Battalion, The Royal Irish Regiment
"We can't let police forces be controlled by single-agenda organisations. It must be a police force for all the people. The Iraqi police force are not in a position to take on responsibility for security."
Dr Rosemary Hollis, Director of Research, Chatham House foreign affairs think-tank
"There have been accusations that the British continue to work with the militia and the local community, which has led to this sorry position. But this is a tried and tested policy that has worked all over the world. The best security is the local community because that's where the best intelligence is. At the same time, the national project has not gelled so there are no laws for the police to uphold."
Sir Iqbal Sacranie, Secretary General of the Muslim Council of Britain
"We shouldn't be there at all. But since we are, we must convey to the Iraqi people that we are not going to stay forever. We can't cut and run but we need to have a clear timetable for a withdrawal so that we pass control on to Iraqi security. That of course assumes there is going to be any control and at the moment it's difficult to see who has control. What we mustn't do is adopt the defiant position of the Americans. We should only stay as long as it is necessary and we should consider what purpose we are serving."