The former head of MI5 delivered a devastating critique of the invasion of Iraq today, saying it substantially increased the threat of terrorist attacks in Britain and was a significant factor behind the radicalisation of young Muslims in the UK.

Lady Eliza Manningham-Buller told the Chilcot inquiry into the UK's role in Iraq: "Our involvement in Iraq radicalised, for want of a better word, a whole generation of young people – not a whole generation, a few among a generation – who saw our involvement in Iraq and Afghanistan as being an attack upon Islam."

Asked by Sir Roderic Lyne, a member of the inquiry, to what extent the conflict exacerbated the threat from international terrorism facing Britain, she replied: "Substantially."

She was not surprised, she said, that UK citizens were behind the 7/7 attacks in London nor that increasing number of Britons were "attracted to the ideology of Osama bin Laden and saw the attacks on Iraq and Afghanistan as threatening their co-religionists and the Muslim world".

Invading Iraq and toppling Saddam Hussein allowed al-Qaida to establish a foothold in Iraq which it had never previously managed. "Arguably, we gave Osama bin Laden his Iraqi jihad so that he was able to move into Iraq in a way that he was not before," Manningham-Buller told the inquiry.

She referred to assessments by the Joint Intelligence Committee, of which she was a member, warning ministers that an invasion of Iraq would increase the terrorist threat to Britain. If they read the reports, she said, ministers would have been in no doubt over the threat.

The former MI5 chief said she did not have individual discussions at the time with Tony Blair about the effect invading Iraq would have on the terrorist threat to Britain. She referred to Sir Richard Dearlove, head of SIS, the Secret Intelligence Service or MI6, which provided intelligence for the infamous Iraqi weapons dossier. "I believe the head of the SIS saw him [Blair] much more frequently than I did, for understandable reasons".

Manningham-Buller also mentioned Sir David Omand, the government's security and intelligence co-ordinator in 2003, who told Chilcot earlier this year that MI6 had "over-promised and under-delivered" on Iraq. She said that in March 2002, a year before the invasion, MI5 had advised the Home Office that Iraqi intelligence agents in the UK would pose little threat in the event of war. "We regarded the direct threat from Iraq as low," she said.

"We did think that Saddam Hussein might resort to terrorism in the theatre if he thought his regime was being toppled, but we didn't believe he had the capability to do anything in the UK. That turned out to be the right judgment," she continued. MI5 was concerned about the threat from al-Qaida before the 9/11 attacks on the US in 2001, she said. She dismissed claims made by elements in the Bush administration that Iraq had been involved. "There is no credible intelligence to suggest that connection. That was the judgment of the CIA. It was not a judgment that found favour in some parts of the American machine," she said. "It is why [former US defence secretary] Donald Rumsfeld started an alternative intelligence unit in the Pentagon to seek an alternative judgment."

She was asked about an interview with the Guardian last year in which she first set out her concerns about an invasion of Iraq. As US and UK forces were preparing to invade, she had asked her superiors, "Why now?" She said it "as explicitly as I could. I said something like, 'The threat to us would increase because of Iraq,' " she told the Guardian.

By focusing on Iraq, the government was diverted from the continuing threat posed by al-Qaida in Afghanistan, Manningham-Buller said today.

Her remark was picked up by Admiral Lord West, then head of the navy and subsequently appointed security minister in the Labour government. "My own personal view is that it is actually a very bad idea to invade people," he told BBC Radio 4's The World at One . "I was never a supporter, I have to say, of going into Iraq. I think it was a foolhardy thing to do when we were already engaged in Afghanistan."

Asked what lessons MI5 had learned from the invasion of Iraq, Manningham-Buller said: "The danger of over-reliance on fragmentary intelligence in deciding whether or not to go to war. Very few would argue that the intelligence was substantial enough to make that decision."

She also said MI5 did not fully appreciate the degree to which British citizens would be involved in terror plots. In 2004, she wrote to the Home Office saying the government needed to think more about the effects of foreign policy on domestic policy.

In her own words

Lady Eliza Manningham-Buller to the Chilcot inquiry:

"We regarded the direct threat from Iraq as low"

"Arguably we gave Osama bin Laden his Iraqi jihad"

"Substantially" – when asked to what extent the conflict in Iraq exacerbated the overall threat facing Britain's security from international terrorism

"Our involvement in Iraq radicalised, for want of a better word, a whole generation of young people – not a whole generation, a few among a generation – who saw our involvement in Iraq and Afghanistan as being an attack on Islam"

"It is fair to say that we did not foresee the degree to which British citizens would become involved …"

"Very few would argue that the intelligence was substantial enough to make that decision [go to war]"

"There is no credible intelligence to suggest that connection [between Saddam Hussein and al-Qaida]. That was the judgment of the CIA. It was not a judgment that found favour in some parts of the American machine"