Costs of two new aircraft carriers for the Royal Navy have risen 25%
The UK should consider slashing defence spending by up to £24bn and revisit plans to renew its Trident nuclear deterrent, a think-tank report says.
Britain cannot afford much of the defence equipment it plans to buy, the Institute for Public Policy Research (IPPR) report says.
Its authors include former defence secretary Lord Robertson and the ex-Lib Dem leader, Lord Ashdown.
The government said it remained committed to renewing Trident.
Lord Ashdown said the UK would have to "reach out to establish a new concordat with other nations and other global powers in order to secure a secure world in changing and turbulent circumstances".
"That does require new thinking," he told BBC Radio 4's Today programme.
"One conclusion we arrive at is we can no longer afford to maintain museum Cold War armaments," he said.
"We can no longer afford to maintain full-spectrum armed forces capable of operating anywhere in the globe like a mini-United States."
The IPPR's recommendations include:
- Scaling back conventional capability by cutting £24bn of planned spending
- Review to consider possible alternatives to Trident or extending life of system
- UK active role in fostering European defence co-operation
- Setting up of National Security Council to co-ordinate security policy
- Greater specialisation in the UK armed forces
'Cold War relics'
The report comes after news of a £1bn cost overrun on two new aircraft carriers.
The original budget for the two carriers for the Royal Navy was £3.9bn but the BBC has seen a memorandum revealing the programme will come under "severe pressure" because of the cost escalation.
The head of the Royal Navy, Admiral Sir Jonathon Band, has previously defended the new carriers from accusations they were outdated "Cold War relics".
His counterpart in the British Army, General Sir Richard Dannatt, had earlier suggested many of the Ministry of Defence's new equipment programmes were "irrelevant" to modern warfare.
Similarly, the IPPR report suggests there ought to be a radical rethink of the way the UK budgets for defence.
Spending on the aircraft carriers, along with the fighters which would fly from them and the destroyers protecting them, should be in the frame for cuts, its report says.
The report says Britain's aim should be to eradicate nuclear weapons, and calls for renewed debate about the Trident submarine-based missile system.
The government is committed to renewing Trident at an estimated cost of £20bn. The policy is backed by the Tories but opposed by the Liberal Democrats and many Labour backbenchers.
Armed forces minister Bill Rammell said the UK was "working towards a world free of nuclear weapons".
"We are the most forward-leaning nuclear state in terms of disarmament - we have reduced the explosive capability of our nuclear arsenal by 75% over the last 10 years," he told BBC Radio 4's Today programme.
But he added: "When we look at the risks moving forward over the coming decades, we don't believe at the moment it would be safe to fail to make decisions now which would effectively commit us to unilateral disarmament in the future, regardless of the circumstances."
Mr Rammell also said that he believed the UK could afford its defence plans.
The report's authors also claim that the mission in Afghanistan is on course for possible failure unless it is changed to include a joint civilian-military stabilisation and reconstruction taskforce.
It also draws lessons from the Mumbai attack in India, appealing for new preventative measures in case the UK has to face a terrorist attack at multiple locations in one of its major cities.
That would be a job for strengthened special forces, not the police, the report argues.
There is also a broader appeal for Britain to do more to co-operate with Europe and stop relying on the US when it comes to security.
The report says Britain would be deluded to think the US would always help out.
Lord Ashdown said: "We are going to have to work more closely with our allies, and in particular our European allies.
"Integration at a European level both of our armed forces and the defence industries is a crucial part of it."
Liberal Democrat defence spokesman Nick Harvey agreed that more European co-operation was needed, and that the UK "cannot mortgage future security solely on the goodwill of the US".
"This report is a wake-up call for the nation. We must act now to make our country safer by using precious resources more effectively," he said.
"We need armed forces that are relevant for the security threats of today and tomorrow."
BBC security correspondent Frank Gardner said the 180-page document, published after two years of research, would carry weight in Whitehall, given its highly-experienced authors.
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But the UK defence industry had reacted angrily to the proposals suggesting cuts to major projects, our correspondent added.
Ian Godden, chief executive of the Society of British Aerospace Companies, said: "The debate about big projects versus better conditions for troops or more boots on the ground and between one service or another is a false one or at best highly risky.
"The real issue is the fact that as a nation we no longer adequately fund our own defence."
He added: "Threats to our security do not go away simply because we are in a recession."
As well as Lord Robertson and Lord Ashdown, former chief of the defence staff Lord Guthrie of Craigiebank, former UK ambassador to the United Nations Sir Jeremy Greenstock, and former Association of Chief Police Officers president Sir Chris Fox also contributed.