The current system to stop the spread of nuclear weapons, based around the Non-Proliferation Treaty (NPT), the 187-signatory agreement which came into force in 1970, was in danger of "eroding", the London-based group said.

The feared spread of nuclear weapons to North Korea and Iran was among factors helping to accelerate this process, it said in its Strategic Survey 2004/5 publication.

Regional instability, "gaping" loopholes in the NPT regime, illegal supply networks and "lax leadership" by the existing nuclear powers pointed to "a first-order crisis that, if not urgently addressed, could trigger an nuclear catastrophe", the report said.

"The most chilling possibility is the acquisition of a nuclear weapon by Al-Qaida or a similar terrorist group dedicated to inflicting mass civilian casualties and impervious to threats of retaliation," it noted.

"The possible emergence of new nuclear-weapon states in North Korea and Iran, the threat of nuclear terrorism around the globe and the relaxed pace of nuclear disarmament strongly suggest the existing nuclear non-proliferation regime -- with the NPT at its core -- is eroding.

"Moreover, it is being replaced with an 'every man for himself' mentality that, if left unchecked, could spawn a new generation of nuclear weapons and increase the risk that the transnational Islamist terrorist network over which Osama bin Laden loosely presides becomes a nuclear power."

Iran was still most likely "several years away" from developing a nuclear weapon, but North Korea probably already had at least one if not two nuclear bombs.

"North Korea raises the dual risk of a growing nuclear-weapon inventory in the world's most isolated regime, and the possibility of nuclear terrorism through the sale or transfer of nuclear material or weapons," the report said.

The IISS called for a renewed commitment to the principles of non-proliferation and disarmament by the existing nuclear powers.