Libyan leader Moammar Gadhafi (search) said the U.S.-led war on terror has strengthened Al Qaeda because Muslims have perceived the wars in Afghanistan and Iraq as aggression against Islam and attempts to spread American influence.

In an interview aired Sunday on ABC's "This Week," Gadhafi stressed that Libya (search) was cooperating with the United States to fight terrorism and the "common enemy" of Al Qaeda. But he criticized America's foreign policy as colonialist and controlled by Jewish groups.

He also said America's targeting of Al Qaeda's leader -- Saudi-born dissident Usama bin Laden (search) -- has transformed him into "a symbol for defending the Islamic world." He did not elaborate.

"As long as America [is] approaching [the war on terror] in such a method ... together with the Israelis ... the more they do that, the more they create an environment or atmosphere for the development of Al Qaeda (search)," Gadhafi said, according to a transcript received by The Associated Press office in Egypt.

Gadhafi's interview with George Stephanopoulos took place Wednesday in Al-Bayda, on the Mediterranean coast about 450 miles east of the LIbyan capital of Tripoli.

Gadhafi described Al Qaeda terrorists as "crazy and insensible people" who have committed attacks on America, Egypt, Nigeria, Sudan, Saudi Arabia and other countries. "So all these countries are fighting one common enemy," he said.

Gadhafi, who has been in power for 34 years, said his country has exchanged information with the Americans and arrested some suspected terrorists who entered Libya after the war in Afghanistan.

"There is an exchange of information and an exchange of persons between these respective countries," Gadhafi said.

The Libyan leader also blamed Saudi Arabia's Wahhabi sect of Islam for being behind the emergence of Al Qaeda and other extremist groups and accused "the regime or the system in Saudi Arabia [as being] based on fundamentalism."

Gadhafi said Libya opposed all extremist and radical Islamic movements and invited Western countries to talk with his World Islamic Leadership, which he said he formed to demonstrate "the civilized aspect of Islam."

Current U.S. policy toward Libya is built largely around U.S. and United Nations requirements stemming from the 1988 bombing of Pan Am flight 103, which killed 270 people over Lockerbie, Scotland.

In 2001, a Scottish court convicted Libyan intelligence agent Abdel Basset Ali al-Megrahi of the bombing and sentenced him to life imprisonment.

When asked if Libya accepted responsibility for the Pan Am bombing and was prepared to pay compensation, as required for the lifting of suspended U.N. sanctions and a U.S. embargo, Gadhafi did not answer directly but said negotiators were nearing a conclusion.

Libya's Foreign Minister Abdel-Rahman Shalqam said in April that Libya accepted "civil responsibility" for the Pan Am's downing and was willing to pay $2.7 billion in compensation in return for the lifting of suspended sanctions and Washington's removal of Libya from its list of states sponsoring terrorism.

But the State Department said last month that Libyan officials still have not met the U.N. Security Council requirement to accept responsibility for the attack.

Turning to ongoing Middle East conflicts, Gadhafi criticized the U.S. approach toward the war in Iraq and the Israeli-Palestinian crisis, saying it caused people to support Al Qaeda and "say that bin Laden is right."

Gadhafi laughed when asked to comment on President Bush's "road map" peace plan to solve the Palestinian-Israeli situation, saying: "It will not succeed."

He reiterated his theory that the land on which Israel and the Palestinian territories are located was too small for two states, and that the solution was to create one country -- Isratine -- for both sides to live in.