UK Muslim communities are home to "thousands of potential home-grown terrorists", former UK Independence Party leader Lord Pearson has warned.
Such people "hate us with frightening religious fervour", he said during a parliamentary debate on Islam.
Sharia law was "running de facto in our land" and calls for violence were not simply coming from a "few extremists".
But faith minister Baroness Warsi said Lord Pearson was either "ignorant" or attempting to "distort" views of Islam.
Lord Pearson, who led UKIP from 2009 to 2010, called a special Westminster debate on Islam.
He mentioned the 7 July 2005 London bombings and the killing of Drummer Lee Rigby earlier this year, adding: "We see large and growing Muslim communities which are set against integration with the rest of us. We see thousands of home-grown potential terrorists."
He went on: "We see Sharia law running de facto in our land and we see a birth rate which is several times ours.
"What baffles me completely is that when we do speak against these things, when we dare to say that they come from within Islam, we are told that we are the guilty ones, that it us who are stirring up hate."
He said: "But the hate lies in the heart of the Islamist. We can only stir it up because it is already there, red hot and seething against us.
"These people hate us with frightening religious fervour and we are right to fear them."
Lord Pearson quoted Tony Blair, who argued that "this strain (of Islam) is not the province of a few extremists".
"Evil is at its most destructive when it passes from the individual to the collective," added the UKIP peer.
Lord Pearson, who sat as a Conservative peer before joining UKIP, told the meeting in Parliament's Moses Room: "I fear the dark side is moving strongly within Islam."
For the government, Lady Warsi responded: "I think it is a great shame at best that the noble gentleman has asked this question. It points at best to an ignorance about Islam and at worst a deliberate attempt to perpetuate a distorted image of the faith."
Being a member of any religion involved "making choices" on how to act on one's beliefs, the Conservative peer added.
On extremists, Lady Warsi added: "Islam, like all other major religions, is not inherently violent. Passages from sacred texts must be taken in context. It would be possible to distort quotes from any religious text."
Talking about the killing of Drummer Rigby, she said: "If Islam justified terror, then we would never have seen the out and out condemnation of this brutal murder."
"Most religions have suffered at most times from extremism. Islam is no exception," Lady Warsi, who is the first female Muslim cabinet minister, said.
Al-Qaeda's beliefs were "at odds with classical and contemporary" mainstream Islam, she added.
"Like all world religions, Islam neither supports nor advocates terrorism," Lady Warsi told peers.