The sun never sets on the war on terror, even as it degenerates into blood and recrimination. The Woolwich trial of eight members of a supposed 13-member gang all but collapsed on Monday. Despite evidence of intent to blow up an airliner, the jury convicted three defendants of conspiracy to commit murder but failed to reach a verdict on the central allegation.

It has been an open secret in police circles that Operation Overt, the most complex in counter-terror history, was sabotaged by the American vice president, Dick Cheney, desperate for a headline boost to the Republicans' 2006 mid-term elections. British intelligence was following trails and acquiring evidence against 20 suspects. They needed American surveillance help in Pakistan and shared their information, foolishly it now appears, with Washington.

The backstory is told in Ron Suskind's new book, The Way of the World. Tony Blair, bursting with news of the operation, discussed it in July 2006 with George Bush, who was impatient for action. The argument, says Suskind, was a classic between American gung ho and British patience.

Nobody was sure if the plot was more than half-baked game-playing and it would certainly need evidence to stand up in court. The British were "treating it all as a criminal matter rather than a historic, and terrorist-glamorising, clash of power and ideology", Suskind writes.

Cheney then privately dispatched the CIA's operations director, Jose Rodriguez, to Islamabad to secure the arrest of one of the British suspects, Rashid Rauf, believed to be a possible link with al-Qaida. The British had been watching him and preparing his extradition. They did not want him rendered useless through CIA or Pakistani torture. Within days, news of Rauf's capture reached the British plotters. In a panic, the police had desperately to round up as many suspects as they could find overnight. According to Suskind, "top officials in British intelligence cursed, threw ashtrays and screamed bloody murder".

Months of work, which might have unpicked an entire al-Qaida network back to the Pakistani training camps, was ruined by "forced, foolish hastiness" - and all for the mid-term elections. Bush was soon boasting of having "foiled a plot to blow up passenger planes headed for the United States".

Two years later, a British jury, having to decide on the basis of evidence whether it faced another 9/11 or just a bunch of crazies, gave the benefit of the doubt to the latter. It was clearly fed up with scare stories and the politics of fear and felt the police had not made a case. Today, many of the plotters are at large, and Rauf himself has mysteriously escaped custody.

This is what happens when criminal conspiracy is redefined as an act of war. It goes political. As a conspiracy to cause mayhem, the suspected airline plotters merited and were getting thorough detective work in what was clearly a superb operation. Because it was also a "war", the death-or-glory boys took over and wrecked it.

Worse than wreck it, they rendered the operation counter-productive. A few sad, disaffected and clearly dangerous youths were captured, but in such a way as to induce many more to sympathise and imitate them. They will be fired by the same resentment at British foreign policy that has turned a crusade to bring democracy to the heathen into a bloody and drawn-out meddling in the affairs of foreign states. That meddling is now overwhelmingly counter-productive, fuelling anti-western insurgency across an arc from Syria through Iraq and Afghanistan to Pakistan. Characterised everywhere as a war on terror, it is further politicised and polarised.

Last week's massive operation by Nato forces to move a dam turbine 100 miles across Helmand was reportedly brought forward at Washington's insistence to help John McCain's candidacy. It cost some 300 Afghan lives. Every one of those lives invites revenge against that dam. Meanwhile, Nato and the Americans are intensifying their bombing of Afghan and Waziri villages. Anyone who visits this theatre is briefed with the same mantra: We are going to stop killing civilians ... Every death is 10 recruits to the enemy ... We must win on the ground not from the air. Airforces claim they can kill with "pinpoint accuracy". They claim the new predator drones can murder a Taliban leader at a mile distant.

They lie. To soldiers on the ground, calling in air power to clear a village is easier and safer than fighting by hand. As a result, and amid a storm of mendacious denials, wedding parties are blown to pieces, houses are crushed, women and children are massacred. To kill a Taliban it is considered worth wiping out a market. British and American generals in Kabul have slid into Vietnam mode, using the enemy kill rate as an indicator of victory. They do not care that one dead Taliban creates 10 live ones.

An Afghan crusade that was possibly winnable in 2001 has been systematically subverted by those waging it. Attempts to destroy the nation's staple crop, opium, has alienated almost everyone and driven huge profits into the pockets of the enemy. It has been unbelievably stupid.

The current use of drones to bomb Pakistani territory, usually on faulty or devious intelligence, is raising whole tribes to fury. It now risks driving an unstable Islamabad regime back into covert, if not overt, support for the Taliban, as in the 1990s. Is this really the intention of Washington and London?

The war on terror has become an exercise in cynicism, a backdrop to domestic politics. Terrorists are a menace to certain western cities. A generation of young Muslims has emerged who see glory in killing civilians for nothing but publicity. They appear loosely aligned with insurgent forces in Pakistan and Afghanistan, much as terrorists in the 1970s and 80s allied themselves with Palestinians. But these terrorists do not constitute a threat to the security of any western state. Their plots and outrages are crimes and do not merit the status of war. They have become servants of political rhetoric. To be tough on terrorism is apparently akin to shooting a moose.

That Nato soldiers can casually bomb civilians in these distant parts, knowing it to be counter-productive, shows the half-heartedness of this so-called war. So does the ease with which politicised intelligence can undermine a criminal investigation. Both make us less safe, not more.

simon.jenkins@theguardian.com