"The world thinks that we are terrorists and responsible for violence around the world," he said.
It led the world to believe Pakistan was a "terrorist and failed state," he told a conference of senior clerics meeting to mark the birth of the Prophet Muhammad.
The BBC's Zaffar Abbas in Islamabad says though it is not clear what has prompted the general to condemn the Islamic militants, his words will be welcomed by human rights activists.
Exporting terrorism
General Musharraf said fanaticism was destroying the social fabric of Pakistan and building a culture of violence within the country.
Violent sectarian clashes between rival Islamic groups have killed at least 80 people in Pakistan in the past five months.
But he said Pakistan had also gained a reputation for exporting terrorists and fundamentalist politics to other regions.
"The world thinks that we are terrorists and responsible for violence around the world," he said.
He denounced hardliners' ambitions which he said included hoisting the flag of Islam in the Indian capital Delhi.
The general said Pakistan's support for what he called the "Kashmiri freedom struggle" was confined to diplomatic backing.
He denounced Islamic groups for openly collecting funds in the name of jihad, or holy war, in the region and said the money often went to build up personal fortunes.
Militant Pakistani volunteers - often recruited from poor families by activists - are active in the Kashmir conflict and also fight alongside the Taleban in Afghanistan.
'Irresponsible statements'
The general, who is a moderate Muslim, said that the politics of violence went against the teachings of Muhammad.
He called on the clerics to stop issuing "irresponsible statements" in their religious statements which call for Muslims to wage holy war against the United States and Russia.
He said if Pakistan wanted to walk in step with the comity of nations, in what was turning into a global village, it must work for tolerance and harmony.