He warned against the acceptance in this country of Sharia laws based on the Koran and added that amplified calls to prayer from mosques are imposing an Islamic character on surrounding areas.
And he complained of the "multi-faith mish-mash" promoted by the Government and blamed it for undermining the influence of Christianity.
The bishop's attack on aggressive Islamic leaders brought condemnation from prominent Muslim groups. One called for the Church of England to take "serious action" against him.
But Shadow Home Secretary David Davis said the bishop had exposed "a deeply serious problem".
The bishop is one of the most senior clergymen in England, pictured here with the Queen
He added that Government confusion "risks encouraging radicalism and creating home-grown terrorism".
Dr Nazir-Ali, who grew up in Pakistan where he suffered harassment for his own Christian faith, warned of no-go areas in an article in the Sunday Telegraph.
He spoke of "a worldwide resurgence of the ideology of Islamic extremism" and added:
"One of the results of this has been to further alienate the young from the nation in which they were growing up and also to turn already separate communities into 'no-go' areas where adherence to this ideology has become a mark of acceptability."
The bishop added: "Those of a different faith or race may find it difficult to live or work there because of hostility to them. In many ways, this is the other side of the coin of far-Right intimidation."
Dr Nazir-Ali said that using amplification for the call to prayer from mosques was an attempt to impose Islam on an area.
This, he said, raised the question of "whether non-Muslims wish to be told the creed of a particular faith five times a day on the loudspeaker.
"This is happening here even though some Muslim-majority communities are trying to reduce noise levels from multiple mosques announcing this call, one after the other, over quite a small geographical area."
The bishop said that the influence-of Christianity was in decline because "the authorities want multi-faith provision", which meant chapels and chaplains in hospitals, prisons and universities were now under threat.
Secularism and the "multi-faith mish-mash" were pushing out Christianity and Government attempts to encourage integration "lack the underpinning of a moral and spiritual vision".
The charges brought an angry response from the Muslim Council of Britain, the Islamic umbrella group which has come back into favour with the Government since Gordon Brown became Prime Minister.
Assistant Secretary-General Inayat Bunglawala said the Government had contributed to the rise of Islamic extremism and compared the Islamic call to prayer with church bells.
'He talks about the rise of "Islamic extremism" but fails to mention how some of the policies of our government and especially that of the United States in the Middle East over several decades now has clearly contributed to this phenomenon.
"He complains of the Islamic call to prayer but presumably is content for all of us to listen to the ringing of church bells. As Jesus himself advised, perhaps the good bishop may want to examine the beam in his own eye before pointing fingers at others."
Mohammed Shafiq, of the Muslim youth group the Ramadhan Foundation, accused Dr Nazir-Ali of attempting to "whip up hatred" against Muslims. The article would "remind people of the road to Nazism", he said.
A spokesman for the Communities and Local Government Department said: "The overwhelming majority of Muslims are peaceful, make a huge contribution to British life and find the views of a small minority of violent extremists completely abhorrent.
"Britain also has a proud tradition of different communities living together side by side."
• The Bishop's attack on Islamic extremism has cemented his place as one of the Church of England's pre-eminent defenders of traditional Christianity.
Michael Nazir-Ali's outspokenness has put him in the vanguard of opposition to hard- line Islamism and made him one of the highest-placed enemies of the gay rights movement.
Born into a Roman Catholic family, Michael Nazir-Ali converted to Anglicanism aged 20.
The 58-year-old father of two has set himself against feminism by criticising couples who decline to have children and he is among the clerics who
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