Europe's leaders, including David Cameron, have been warned to adopt a more "cautious" approach when discussing multiculturalism. The Norwegian chairman of the Nobel peace prize committee has told them they risk inflaming far-right and anti-Muslim sentiment.

Thorbjørn Jagland, a former prime minister of his country, said leaders such as the British premier would be "playing with fire" if they continued to use rhetoric that could be exploited by extremists.

Four months ago in Munich, Cameron declared that state multiculturalism had failed in Britain, a view immediately praised by Nick Griffin, leader of the BNP, as "a further huge leap for our ideas into the political mainstream". Marine Le Pen, vice-president of the far-right National Front party in France, also endorsed Cameron's view of multiculturalism, claiming that it corroborated her own party's line.

Jagland's comments come in the wake of the Oslo bomb and the massacre on Utøya Island that left 77 people dead. The killer, Anders Behring Breivik, said he was inspired by the right-wing English Defence League. Breivik sent his manifesto, published online hours before the attacks, to about 250 British members of the BNP, the EDL and the Stop Islamisation of Europe group.

Jagland, who is also secretary general of the Council of Europe, told the Observer: "We have to be very careful how we are discussing these issues, what words are used.

"Political leaders have got to defend the fact that society has become more diverse. We have to defend the reality, otherwise we are going to get into a mess. I think political leaders have to send a clear message to embrace it and benefit from it.

"We should be very cautious now, we should not play with fire. Therefore I think the words we are using are very important because it can lead to much more."

Jagland has also urged leading politicians to change their terminology. He said the word "diversity" was better than multiculturalism because the latter had become defined in different ways by different groups. "We also need to stop using 'Islamic terrorism', which indicates that terrorism is about Islam. We should be saying that terrorism is terrorism and not linked to religion," said Jagland.

Over the years before his attacks, Breivik developed an ultra-radical stance that initially incorporated the forced repatriation of Muslims from Europe, but ultimately targeted Norway's centre-left government, which had encouraged multiculturalism. During his court appearance on terrorism charges, the 32-year-old said he had acted to prevent the "Muslim takeover" of Europe.

It hasemerged that during a 10-hour interrogation, Breivik told police that he also considered attacking other government and Labour party targets in Norway. Police attorney Paal-Fredrik Hjort Kraby revealed that Breivik had again asked interrogators how many people he had killed and "showed no emotion" when they told him.

As Norway struggles to come to terms with the killings, with the first of the dead being buried on Friday, the process of establishing whether Breivik is insane, as his lawyer has asserted, is due to begin. Psychiatrists said the process would involve months of observation, interviews and analysis, insisting that it is hard to fake mental illness. It has also emerged that more than 250 people were picked up by boats from the waters off Utøya Island as Breivik conducted his 90-minute shooting rampage. About 650 people were on the island, of whom at least 68 were killed, most of them teenagers.

During Cameron's Munich speech, which combined a passage on terrorism with one on integration, the prime minister talked extensively about "Islamist extremism" as being the source of terrorism.

Breivik saw David Miliband, Gordon Brown and Tony Blair as worthy of assassination because, according to his 1,500-page manifesto, they had a "friendly attitude" to immigrants.

Jagland says he has sympathy with Cameron's attempt to robustly promote a shared set of British values as an alternative to multiculturalism, if not with his delivery. "We are not searching for a society where we have only different cultures. We also need to have something that holds us together, to respect common values," he said.

Jagland, who last year gave the Nobel peace prize to jailed Chinese dissident Liu Xiaobo, who was represented by an empty chair at the ceremony in Oslo, added that the immigration debate also needed to be less negative.