Allawi said there was no other way to describe the increasing violence across the country.
"It is unfortunate that we are in civil war. We are losing each day as an average 50 to 60 people throughout the country, if not more," Allawi told the BBC. "If this is not civil war, then God knows what civil war is."
Allawi heads the Iraqi National List, a secular alliance of Shiite and Sunni politicians.
While visiting British troops in Iraq on Sunday, defense secretary John Reid said Allawi's remarks to the BBC contradicted what the former prime minister had told him in a meeting on Saturday.
"Every single politician I have met here from the prime minister to the president, the defense minister and indeed Ayad Allawi himself yesterday said to me there's an increase in the sectarian killing, but there's not a civil war and we will not allow a civil war to develop," Reid said.
"The essential thing is to show maximum unity in a government of national unity so that the terrorists that do want a civil war do not get their wish."
Allawi said the violence in the country was moving toward "the point of no return" and that Iraq is "in a terrible civil conflict."
Allawi warned that European nations and the United States would not be immune from the conflict, saying that not only will Iraq "fall apart," but that "sectarianism will spread throughout the region, and even Europe and the United States would not be spared all the violence that may occur as a result of sectarian problems in this region."
Not surprisingly, U.S. Defense Secretary Donald Rumsfeld disagreed.
In a Washington Post column Sunday, Rumsfeld argued that talk of civil war has been overblown, promoted mostly by terrorists, who, as the defense secretary said, "seem to recognize that they are losing in Iraq."
Rumsfeld added that failing to fight terrorists in Iraq, "would be the modern equivalent of handing postwar Germany back to the Nazis."
After the bombing of the Shia shrine at Samarra on Feb. 22, there was an increase in civil violence, leading observers to say that the country was on the brink of civil war, an assertion that has been rejected by lawmakers.
Allawi said that playing down the current problems in Iraq would be a mistake, and told the BBC that he had warned against creating a power vacuum and the prevalence of militias.
Allawi said the formation of a national unity government was the means the country needs to achieve the goal of a peaceful country.
Iraq's newly elected Parliament was seated on Thursday, and representatives of its Shiite Arab, Sunni Arab and Kurdish blocs have been meeting in an effort to overcome deep divisions and agree on the makeup of a new government. The minority factions want to block broad Shiite control of powerful ministries.
Allawi, a secular Shiite whose nonsectarian party won 25 seats in December parliamentary balloting, was among the groups trying to block the candidacy of Prime Minister Ibrahim al-Jaafari.
Al-Jaafari, the opposition groups contend, would not represent their interests and did too little to stop Shiite revenge attacks in the aftermath of the Samarra shrine bombing.