Britain's most senior generals have issued a blunt warning to Downing Street that the military campaign in Afghanistan is facing a catastrophic failure, a development that could lead to an Islamist government seizing power in neighbouring Pakistan.

Amid fears that London and Washington are taking their eye off Afghanistan as they grapple with Iraq, the generals have told Number 10 that the collapse of the government in Afghanistan, headed by Hamid Karzai, would present a grave threat to the security of Britain.

Lord Inge, the former chief of the defence staff, highlighted their fears in public last week when he warned of a 'strategic failure' in Afghanistan. The Observer understands that Inge was speaking with the direct authority of the general staff when he made an intervention in a House of Lords debate.

'The situation in Afghanistan is much worse than many people recognise,' Inge told peers. 'We need to face up to that issue, the consequence of strategic failure in Afghanistan and what that would mean for Nato... We need to recognise that the situation - in my view, and I have recently been in Afghanistan - is much, much more serious than people want to recognise.'

Inge's remarks reflect the fears of serving generals that the government is so overwhelmed by Iraq that it is in danger of losing sight of the threat of failure in Afghanistan. One source, who is familiar with the fears of the senior officers, told The Observer: 'If you talk privately to the generals they are very very worried. You heard it in Inge's speech. Inge said we are failing and remember Inge speaks for the generals.'

Inge made a point in the Lords of endorsing a speech by Lord Ashdown, the former Liberal Democrat leader, who painted a bleak picture during the debate. Ashdown told The Observer that Afghanistan presented a graver threat than Iraq.

'The consequences of failure in Afghanistan are far greater than in Iraq,' he said. 'If we fail in Afghanistan then Pakistan goes down. The security problems for Britain would be massively multiplied. I think you could not then stop a widening regional war that would start off in warlordism but it would become essentially a war in the end between Sunni and Shia right across the Middle East.'

'Mao Zedong used to refer to the First and Second World Wars as the European civil wars. You can have a regional civil war. That is what you might begin to see. It will be catastrophic for Nato. The damage done to Nato in Afghanistan would be as great as the damage done to the UN in Bosnia. That could have a severe impact on the Atlantic relationship and maybe even damage the American security guarantee for Europe.'

Ashdown said two mistakes were being made: a lack of a co-ordinated military command because of the multinational 'hearts and minds' Nato campaign and the US-led Operation Enduring Freedom offensive campaign against the Taliban. There was also insufficient civic support on, for example, providing clean water.

Ashdown warned: 'Unless we put this right, unless we have a unitary system of command, we are going to lose. The battle for this is the battle of public opinion. The polls are slipping. Once they go on the slide it is almost impossible to win it back. You can only do it with the support of the local population.

'There is a very short shelf life for an occupation force. Once that begins to shift against you it is very very difficult to turn it round.'

The warnings from Ashdown and the generals on Afghanistan will be echoed in a report this week by the all-party Commons defence select committee. MPs will say that the combination of civilian casualties, war damage and US-led efforts to eradicate lucrative poppy crops risk turning ordinary people towards the Taliban.

Stepped-up reconstruction efforts are essential, the MPs will suggest, in order to ensure local residents understand the longer-term aim of the British-led Nato mission - a point echoed, during the committee hearings on Afghanistan earlier this year, by returning British commander General David Richards.

The report is also expected to criticise some Nato members for failing to provide sufficient troops or other support for the Afghan mission.

Adam Holloway, a Tory member of the committee who is a former Grenadier Guards officer, said: 'We are getting to the point where it will be irretrievable. That's where we are now. We are in danger of a second strategic failure [after Iraq], which we cannot afford.'