His comments came as the governor of the province where the alleged abuse took place called for a trial before an Iraqi court of the soldiers implicated.
Mr Reid said critics should be "very slow to condemn" British armed forces who faced a situation that was "far more difficult than at any time in history because we face an enemy that is completely unconstrained".
"The international terrorist is not constrained by legality, by morality, by any convention, Geneva or otherwise, yet our troops are increasingly constrained not just by international law and convention, the standards we want to keep, but by media scrutiny, by video phone, by mobile phone, by satellite dishes," he told BBC television.
Mr Reid said increased scrutiny was "not necessarily a bad thing" but stressed that terrorists were prepared to use a variety of methods to "undermine the morale and the will of democracies" to fight to defend their freedoms.
"The terrorist, who would never allow any freedom on television, will use our television to show hostages being demeaned, being degraded and in some cases being executed," he said.
"Why? Because they use our freedom as the tool to terrorise our people. We ought to be very slow to condemn our troops fighting in those circumstances and I think the public agree with that."
The defence secretary, who is due to give a keynote speech in London on Monday calling for greater understanding of the realities of modern combat, again condemned the apparent abuse images, which were shot after riots in southern Iraq in 2003.
But he insisted they needed to be viewed in the context that between 80,000 and 100,000 British troops had served in Iraq since the US-led invasion of 2003.
During that time, there had been only five "sustainable allegations" of mistreatment against 20 to 30 Iraq civilians, he said.
Britain currently has about 8,000 troops stationed in Iraq's four southern provinces.