The invasion of Iraq triggered a massive upsurge in terrorist activity against the UK, the former head of MI5 said.
Baroness Manningham-Buller said the Security Service had been forced to seek a doubling of its budget as it struggled to cope with the volume of plots generated in the aftermath of the invasion in 2003.
Giving evidence to the official inquiry into the conflict, she said ministers had been warned that the launch of military action against Iraq would lead to a heightened prospect of attack by al Qaida.
However she acknowledged that MI5 had been slow to appreciate that the main threat would come from "home-grown" terrorists.
Lady Manningham-Buller - who is the only member of the intelligence agencies, past or present, to give evidence to the inquiry in public about their work - was scathing about the way intelligence was used to make the case for war.
The evidence of Saddam Hussein's supposed weapons of mass destruction (WMD) had been "fragmentary", she said, and she dismissed Tony Blair's argument that action had been necessary to prevent them falling into hands of terrorists.
She disclosed that MI5 had refused to contribute to the Government's dossier on Iraqi WMD in 2002 and she criticised the way that the invasion had shifted attention away from the al Qaida threat in Afghanistan.
The toppling of Saddam had, she suggested, also given al Qaida a foothold in Afghanistan for the first time. "Arguably we gave Osama bin Laden his Iraqi jihad," she said.
Following the hearing, her comments were echoed by the head of the Royal Navy at the time of the invasion, Admiral Lord West of Spithead, who described the military action as "foolhardy".
Lady Manningham-Buller said that MI5 had assessed as early as 2002 that Iraqi intelligence agents in the UK would not pose much of a threat in the event of military action against Saddam.
