"The fact that Israel was attacked last summer from two areas it left strengthens the sense of a dead end, and proves that the root of the conflict is not the occupation of territories," Yaalon said.
He added that Hizbullah's aim was not the liberation of Lebanon, but the destruction of the State of Israel, and that the same was true of the Palestinian Hamas government.
"Erase the green line and the '67 borderers - Israeli concessions will only aid jihadists," Yaalon declared.
Turning to the Iranian threat, Yaalon said: "We cannot avoid confrontation with the Iranian regime.
"The sense of self-confidence in Iran is growing, and they have not paid any price for being a rogue regime. If we do not take political and economic steps, we are actually bringing a military conflict closer," the former chief of staff warned.
"This (Iranian) regime won't last forever," Yaalon said, but added: "I don't see any internal change without a shock coming from outside.
"Iran is a rogue government that supports terrorism. It must be punished by the international community," he insisted.
'UN losing authority'
Yaalon slammed the United Nations for failing to punish Hizbullah, Syria and Iran during the Lebanon war, saying that the international body "is losing authority in the world " as a result.
He urged cooperation with Sunni elements that "view the Shiite hegemony as a threat to their existence."
"The clash of civilisations is also going on inside the Muslim world. Not all Muslims are jihadists," Yaalon emphasized. "They too see what is happening in Gaza, and recognize that the culture of death is destructive. The West and Israel must make contact with them."
In response to a question as to the viability of the two-state solution, Yaalon said: "There is no full program on how it will look in the end. You have to point to the challenges and offer a strategy for the long-term. I don't know what will happen. I know those who talk about a road map or call for pressure on Israel to take a step to solve the problem (are suggesting for something that is) irrelevant. Withdrawal will not solve the Israeli-Palestinian conflict or solve the jihadi threat."
'Palestinian education root of terror'
He added that without a drastic reform in the Palestinian education system, which he said brainwashed children to become terrorists, there could be no hope for peace. "We tried to ignore the education in Palestinian society. Eventually we were surprised that (Palestinian) society, educated from kindergarten to become suicide bombers, acted as it did," Yaalon said, pointing to the bomb attacks throughout the Oslo years of the 1990s.
"The basis of our belief, that the other side wants two states, is false. I think there is deep understanding among the American public over this," Yaalon added.
His comments were backed by former CIA Director James Woolsey. "As long as Wahabis are running Palestinian education, and little boys are taught to be suicide bombers, I don't see any reasonable prospects for settlement," Woolsey said.
The former CIA chief added that in Israel, one - fifth of the population is Arab, living freely with full rights. He called for Palestinians to be held "to the same standard as Israel," adding that if standards were the same, "something in the order 500,000 Jews would be living in West Bank," with freedom of expression and religion.