Eliza Manningham-Buller says young British Muslims are being groomed to become suicide bombers and that the threats may involve chemical and nuclear devices.
Ms Manningham-Buller says her agents are tracking about 1,600 suspects most of whom are British-born and linked to al-Qaeda in Pakistan.
Prime Minister Tony Blair has backed the warning saying it's a threat which can only be combated by tough terrorism laws and fighting poisonous propaganda influencing young people.
But Islamic Human Rights Commission chairman, Massoud Shadjareh, has disputed figures quoted by the spy chief.
He says out of the more than 1,000 people arrested under terrorism laws, only 27 have been convicted and only eight are Muslims.