Al Qaeda still has a functioning leadership despite the death or capture of key figures, and estimates suggest al Qaeda operates in more than 60 nations around the world, the International Institute for Strategic Studies said in its Strategic Survey 2003-4.
The terrorist group poses a growing threat to Western interests and attacks are likely to increase, the institute said.
"Overall, risks of terrorism to Westerners and Western assets in Arab countries appeared to increase after the Iraq war began in March 2003," institute director John Chipman told a news conference to launch the annual survey.
"Al Qaeda must be expected to keep trying to develop more promising plans for terrorist operations in North America and Europe, potentially involving weapons of mass destruction," Chipman said.
At the same time, it will continue carrying out attacks on "soft targets encompassing Americans, Europeans and Israelis and aiding the insurgency in Iraq," he added.
"Al Qaeda has become increasingly decentralized and now has to rely to a much greater extent for the operational heavy lifting of terrorist attacks on local groups and affiliates," Johnathan Stevenson, an IISS employee, told CBS News Correspondent Mark Phillips.
The estimate of 18,000 fighters was based on intelligence estimates that al Qaeda trained at least 20,000 fighters in its training camps in Afghanistan before the United States and its allies ousted the Taliban regime. In the ensuing war on terror, some 2,000 al Qaeda fighters have been killed or captured, the survey said.
The United States remains al Qaeda's prime target, the report said. An al Qaeda leader has said 4 million Americans will have to be killed "as a prerequisite to any Islamic victory," the survey said.
Iraq has become the new magnet of al Qaeda's war against the United States and up to 1,000 foreign Islamic fighters have infiltrated Iraqi territory, where they are cooperating with Iraqi forces, the survey said.
Al Qaeda appears to have successfully reconstituted its operations in dispersed groups and through local allies since being driven out of Afghanistan, the survey said.
"The Madrid bombings in March 2004 suggested that al Qaeda had fully reconstituted, set its sights firmly on the U.S. and its closest Western allies in Europe, and established a new and effective modus operandi," the survey said.
Photos of the sophisticated devices used in the Madrid bombing obtained by CBS News show how the alarm circuit of a mobile phone, wired to plastic explosives and several pounds of bolts and nails, was designed to kill.
The U.S.-led war in Iraq has increased the risk to Western interests in Arab countries, the survey said.
The West and its allies must continue to mount a major offensive against al Qaeda and progress will be incremental, the report said. Any security offensive against al Qaeda must be accompanied with political developments, such as the democratization of Iraq and the resolution of conflict in Israel, it said.
Progress against al Qaeda "is likely to accelerate only with currently elusive political developments that would broadly depress recruitment and motivation," the report said.
In Iraq, IISS said progress "has been undermined by a lack of troops, poor institutional links between the Coalition Provisional Authority (CPA) and Iraqi society and the inability of the
Iraqi Governing Council to act as a rallying point for political support or loyalty from ordinary Iraqis."
Private militias, like radical cleric Muqtada al-Sadr's al-Mahdi army now battling U.S. troops in Najaf and Kufa, are the biggest problem in Iraq, IISS said. If violence persists, more ordinary Iraqis will look to militias to restore order, rather than U.S. troops.
However, since militias lack broad popular support, a sectarian civil war is "very unlikely in the short to medium term," IISS concludes, although elections looming at the end of 2004 or early 2005 will be "a crucial test."
The IISS annual survey identifies widespread effects of the U.S. invasion of Iraq.
Besides its impact on the war on terror, the Iraq conflict forced the Bush administration to take a back seat in efforts to stop suspected nuclear weapons programs in Iran and North Korea, and to forge Middle East peace.
Also hindering U.S. efforts to stop nuclear proliferation, Chipman said, was the fact that "the Bush Administration remained deeply divided over policies towards Iran and