"If Israel doesn't follow up the disengagement with more 'action', there will be another outburst of violence. Terrorism will return in all its forms - shooting attacks, car bombs, suicide attacks, mortars, and Qassam rockets," Yaalon was quoted as saying by "Haaretz."
Yaalon said the first outburst would be in the West Bank, but would quickly spread to Israel's heartland - cities such as Tel Aviv, Kfar Saba, and Jerusalem.
"Tel Aviv will be like Sderot," he said, referring to the southern town that has been pounded by Palestinian rocket attacks in recent months."There is a high probability of a second terror war."
Palestinian state 'dangerous' for Israel
According to Yaalon, the establishment of a Palestinian state would lead to war that could be very dangerous for Israel.
"The idea that there could be a Palestinian state by 2008 is simply divorced from reality and dangerous," he said. "Such a state would act to undermine the State of Israel."
Yaalon added that the recent statements of Palestinian Authority Chairman Mahmoud Abbas indicate the Palestinians have not given up on the "right of return."
"(And) he is not calling about a symbolic realization of this, but for an actual return to the homes and villages.
"The implication of this is clear: there would be no Jewish state," said Yaalon.
Two-state solution 'irrelevant'
Yaalon also rejected the idea of a "two-state solution" to the Israel-Palestinian conflict, saying the idea could never bring about regional stability.
"The paradigm is just not relevant," he said. "It's being pushed by the Western world through Western eyes. But it doesn't take into account the huge gap between us, or the real size of the problem. We Israelis also prefer to sweep this under the carpet."