There are currently 8,000 Muslims in UK prisons. And up to ten per cent of them have been radicalised by preachers of hate, the Royal United Services Institute (RUSI) report claims.
It says Islamic terror groups are moving away from highly organised, large-scale attacks.
Solo strikes by less trained extremists on high-profile targets are planned instead.
Strengthened security at airports has also forced fanatics to look for softer targets, including trains and hotels.
The report, by RUSI director Michael Clarke and terror expert Valentina Soria, says: "The natural reaction to improved counter-terrorist operations is for jihadist attacks to evolve towards more individual efforts.
"Lone killers will always exist - and some of them will succeed.
"Eventually one of them will be lucky enough to succeed in a major way against a high-profile target in a Western country."
The failed attempt to car bomb Times Square, New York, on May 1 is seen as an example of the new approach.
The report adds: "The possibility of attacks now hangs over all major sporting events - from the Commonwealth Games in India and the 2012 Olympic Games in London, to World Cup tournaments."
The Ministry of Justice said last night that it "did not recognise" the figure of 800 violent radicals in prisons.
But a spokesman added: "We recognise the risk of radicalisation in the prison system and run a dedicated, expert unit which leads work to tackle the risk posed by offenders with extremist views."
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