British Prime Minister Tony Blair acknowledged Sunday the West had changed strategy in the fight against terrorism, telling Pakistan's president that brokering a broad Mideast peace deal was now as crucial as using force to battle militants.

Pakistani leader Gen. Pervez Musharraf, who switched his country's support from the Taliban in Afghanistan to the U.S. following the Sept. 11, 2001, attacks, said "the knot of terrorism will be untied through first resolving the Palestinian dispute."

Musharraf also acknowledged that his government's efforts to cut off support for the Taliban in northwestern Pakistan had not achieved "100 percent success." Pakistan has come under increasing pressure to crack down on Taliban and al Qaeda militants operating along its border with Afghanistan, where Usama bin Laden believed to be hiding.

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"The Taliban problem is an Afghan problem ... being supported by elements from this side," Musharraf said. "We need to put our house in order on our side."

The Pakistani leader also said Afghanistan needed reconstruction aid similar to the U.S. Marshall Plan for the rebuilding of Europe following World War II, especially needed in the country's southeast, where the Taliban has been expanding its support among residents.

Blair's office said $10.5 billion in Afghan aid was pledged at a London donor's conference in January, but the problem was getting the infrastructure in place to spend the money.

Blair said aid, moderate Islamic role models and a lasting resolution of the Israeli-Palestinian conflict were key to defeating extremism, as he agreed to a package of joint security and education ventures with Pakistan.

"We begin to win when we start fighting properly and I think we are now fighting properly -- but we have got to do more," Blair said after the talks with Musharraf in the eastern city of Lahore. "Where there are people standing up for a different way forward, we have to back them."

Blair said bringing peace to Israel and the Palestinian territories would help. "This global extremism is an ideology that exploits grievances. So what we have to do is at the same time as we are taking on the ideology, we have to take away those elements of grievance," he said.

"This took a generation to grow and it will take a generation to defeat," he said after signing an agreement announced Saturday to double to $910 million package of aid to fund moderate Islamic schools and other projects in Pakistan.

Blair's comments followed an interview Friday with Al-Jazeera's English-language channel in which he appeared to agree with broadcaster David Frost's claim that operations in Iraq had "so far been pretty much of a disaster."

His office said Blair had made a "straightforward slip of the tongue," and had only "half-listened" to Frost's question.

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