Tony Blair's claim that there is no link between Britain's foreign policy and terrorist attacks in this country is blown apart by a secret cabinet memo revealed today.

A classified paper written by senior Downing Street officials says that everything Britain does overseas for the next decade must have the ultimate aim of reducing "terror activity, especially that in or directed against the UK".

The memo, circulated in recent weeks to ministers and security chiefs and seen by The Sunday Telegraph, outlines an extraordinary "wish list" of how the Government would like world troublespots to look in 10 years' time. It also signals a drive to reduce Britain's military commitments around the globe.

It admits that, in an ideal world, "the Muslim would not perceive the UK and its foreign policies as hostile" – effectively accepting the argument that Britain's military action in Iraq and Afghanistan has served as a recruiting sergeant for Islamist terrorist groups. Publicly, Mr Blair has resisted this line fiercely. During his final speech as leader to Labour's annual conference last month, he described such claims as "enemy propaganda".

His cabinet allies have supported his position. Earlier this year, John Reid, the Home Secretary, said: "I think it is a dreadful misjudgment if we believe the foreign policy of this country should be shaped in part, or in whole, under the threat of terrorist activity, if we do not have a foreign policy with which the terrorists happen to agree."

But the memo leaves no doubt that all foreign policy must be driven by the goal of thwarting terrorism in Britain. It demands a "significant reduction in the number and intensity of the regional conflicts that fuel terror activity".

After a decade, Iraq must have "stable central and local government, accepted by all sectarian groups". Afghanistan must be "stable, democratic, with all territory under central government control".

Israel must have "secure borders" and live in "peaceful co-existence" with its Arab neighbours, while Iran must have a "representative, tolerant government … no nuclear weapons" and "no sponsorship of terrorism".

The document concludes: "If all or most of the above were in place, threats from other sources of Islamic terrorism (eg Indonesia, Philippines, Nigeria) would be manageable or on the way to resolution. Any remaining deployments of the British armed forces should be seen as contributing to international stability and security."

A Downing Street spokesman declined to comment on the memo. However, in an interview, Margaret Beckett, the Foreign Secretary, played down suggestions that large numbers of British troops may soon be coming home from Iraq. "I think you're perhaps a little impatient to see a huge change, which I don't think we are yet in," she said.

She acknowledged, how-ever, that Britain and America had failed, before going to war, to predict that "there were huge pent-up hatreds and resentments in Iraq which exploded once Saddam Hussein was deposed".

After a decade, Iraq must have "stable central and local government, accepted by all sectarian groups". Afghanistan must be "stable, democratic, with all territory under central government control".

Israel must have "secure borders" and live in "peaceful co-existence" with its Arab neighbours, while Iran must have a "representative, tolerant government … no nuclear weapons" and "no sponsorship of terrorism".

The document concludes: "If all or most of the above were in place, threats from other sources of Islamic terrorism (eg Indonesia, Philippines, Nigeria) would be manageable or on the way to resolution. Any remaining deployments of the British armed forces should be seen as contributing to international stability and security."

A Downing Street spokesman declined to comment on the memo. However, in an interview, Margaret Beckett, the Foreign Secretary, played down suggestions that large numbers of British troops may soon be coming home from Iraq. "I think you're perhaps a little impatient to see a huge change, which I don't think we are yet in," she said.

She acknowledged, how-ever, that Britain and America had failed, before going to war, to predict that "there were huge pent-up hatreds and resentments in Iraq which exploded once Saddam Hussein was deposed".

TONY Blair's claim that the war in Iraq has not fuelled terrorism was dealt a devastating blow last night as leaked Cabinet documents acknowledged that Britain's military forays had contributed to extremist attacks.

Papers put before a Cabinet committee on security earlier this month, and circulated to ministers and security chiefs, declare bluntly that the UK should rein in its ambitions in the Middle East.

In a frank declaration, the papers demand "a significant reduction in the number and intensity of the regional conflicts that fuel terror activity".

The assertion is a hammer blow to the Prime Minister, who has attempted for months to separate the Iraq conflict from terror attacks such as last year's London bombings.

He has consistently claimed that as attacks like 9/11 pre-date the Iraqi offensive, there can be no link between increased terror activity and Britain's foreign policy.

But the private papers appear to blow a hole in his argument.

The revelations could not come at a worse time for the Prime Minister, who this week must face the first Commons vote on the war since the fall of Saddam Hussein.

The SNP will lead a debate on Tuesday calling for senior MPs to head an inquiry into the run-up to the war and handling of the aftermath.

The government will now come under massive pressure from critics who argue that the Iraqi war has made Britons less safe.

The Cabinet papers say that actions overseas must in future be designed to reduce the threat of terrorism.

They add that, in an ideal world, "the Muslim would not perceive the UK and its foreign policies as hostile".

They then go on to set out a list of "perfect scenarios" in a series of trouble-spots - including stability for Iraq and Afghanistan - 10 years from now.

As well as Israel living in "peaceful coexistence" with its Arab neighbours and Iran being devoid of nuclear weapons, they say that there should be "no new failed states, dictatorships or wars" in the Middle East and South Asia.

"If all or most of the above were in place, threats from other sources of Islamic terrorism (eg Indonesia, Philippines, Nigeria) would be manageable or on the way to resolution," they conclude.

In a clear indication of the government's lowering ambitions, the papers conclude: "Any remaining deployments of the British armed forces should be seen as contributing to international stability and security."

Actions should be designed to reduce terrorism, "especially that in or directed against the UK".

Blair's holding line on Iraq has taken a battering in recent months, especially after the posthumous video recording of one of the London bombers, Shehzad Tanweer, who said his actions were provoked by British foreign policy and that attacks would continue until soldiers were withdrawn from Iraq and Afghanistan.

That followed a poll which showed that a quarter of British Muslims believed the 7/7 attacks to be justified because of the government's support for the War on Terror.

Downing Street declined to comment on the leaked documents last night. However, a spokesman said: "We recognise that people have used Iraq as an excuse for terrorist activity, but clearly plenty of terrorist activity against the UK and its citizens has pre-dated that."

Blair is now facing the genuine prospect of defeat in Tuesday's debate. More than 30 Labour MPs have already put their name to an identical motion tabled last November. If they support it on Tuesday they will reduce Labour's 67-seat majority to a single vote at a stroke.

The greater threat could come from David Cameron, who is considering ditching the Tories' long-held support for the Iraq policy by abstaining from a vote.

Scotland on Sunday understands that the Tory leadership favours a large-scale inquiry into the Iraq imbroglio along the lines of the Franks Inquiry into the Falklands War in 1982.

In a separate development, Foreign Secretary Margaret Beckett last night played down the suggestion that large numbers of British troops might be returned home soon.

"I think you're perhaps a little impatient to see a huge change, which I don't think we are yet in," she said.

Tony Blair's most trusted military commander yesterday branded as 'cuckoo' the way Britain's overstretched army was sent into Afghanistan.

The remarkable rebuke by General the Lord Guthrie came in an Observer interview, his first since quitting as Chief of the Defence Staff five years ago, in which he made an impassioned plea for more troops, new equipment and more funds for a 'very, very' over-committed army.

The decision by Guthrie, an experienced Whitehall insider and Blair confidant, to go public is likely to alarm Downing Street and the Ministry of Defence more than the recent public criticism by the current army chief Sir Richard Dannatt. 'Anyone who thought this was going to be a picnic in Afghanistan - anyone who had read any history, anyone who knew the Afghans, or had seen the terrain, anyone who had thought about the Taliban resurgence, anyone who understood what was going on across the border in Baluchistan and Waziristan [should have known] - to launch the British army in with the numbers there are, while we're still going on in Iraq is cuckoo,' Guthrie said.

In a unprecedented show of scepticism towards Blair, he said the Prime Minister's promise to give the army 'anything it wants' was unrealistic. 'I'm sure he meant what he said. He is not dishonest. But there is no way you can magic up trained Royal Air Force crews, or trained soldiers, quickly. You can't magic up helicopters, because there aren't any helicopters,' said Guthrie, promoted from chief of army staff to become overall head of the military for Blair's first term of office.

Guthrie said Britain was 'reaping the whirlwind' for assuming too great a 'peace dividend' after the Cold War and risks being ill-equipped for a whole new set of dangers.

He also cast doubt on suggestions of an early pullout from Iraq, saying that Britain could not afford to leave a 'bloodbath' behind.

Guthrie's comments will be given even further weight with the publication of a report on Friday by the National Audit Office that is expected to warn that the armed forces are failing to recruit and retain sufficient numbers to deliver the 'required military capability'. The report will echo Guthrie's warning that the armed forces are likely to remain seriously stretched 'for the foreseeable future'.

Guthrie voiced concern that ministers, civil servants and even some in the military were assuming that 'Afghanistan and Iraq are something we're going to muddle through for another couple of years and then we'll be able to go back' to a period of relative calm. 'I don't see that happening. I think we're in an extremely volatile, dangerous world,' he said. 'It's no good governments saying we're going to keep out of these things. They don't always have the luxury of choice. The type of crisis is actually quite difficult to forecast. But sure enough, we are going to have crises. There is absolutely no reason to suppose that the world is going to settle down in the foreseeable future. We're not going to be allowed to graze in Elysian fields with the sun on our backs.'

What was needed, he argued, was a fundamental new look at the needs of the British military in the 21st century - as the last strategic defence review, in 1998, had been geared to a dramatically different world. 'What are we actually going to be faced with?' he said. 'A lot has changed and we do actually need more soldiers to actually do the tasks - and new equipment. And we are saddled with some things that it doesn't look awfully likely we're going to use.'

In Iraq, he said, there were three possible scenarios for British forces. The first would be an immediate pullout and the prospect of civil war. The second was to partition the country, but that would risk the slaughter of minority communities in each of the new states. 'We would have to live with it for ever if we left and they were put to the sword,' he said.

That left the hope of somehow creating a more loosely 'federated' Iraq - a 'last chance saloon' option, but one which Guthrie felt might still be workable. 'We have to stick with Iraq not least because in international terms the price of failure is far greater than in Afghanistan'. Iraq could cause problems in the region for years, he said, with implications for Jordan and Turkey, as well as for Saudi Arabia and the Gulf states.