Islam, known for several hit songs in the 1970s, was en route to the US with his daughter on Tuesday when his commercial flight was rerouted on orders from US security officials.
After deboarding in Bangor, Maine, he was flown to Washington, DC for questioning and then deported back to Britain.
US Homeland Security spokesman Brian Doyle said Islam had been denied entry because of "activities that could be potentially linked to terrorism".
'Initiated legal process'
The 57-year-old singer said on Friday he wanted to clear his name and ensure nothing similar happened again.
"I was not given (and still haven't been given) any explanation as to what it is I am accused of, or why I am now deemed an apparent security threat," he said in a statement.
"We have now initiated a legal process to try to find out exactly what is going on, and to take all necessary steps to undo the very serious, and wholly unfounded, injustice which I suffered," he added.
The deportation angered Muslims in Britain and the United States. British Foreign Secretary Jack Straw raised the issue with US Secretary of State Colin Powell in person at the United Nations.
'Man of Peace'
Islam said he was "a man of peace", adding: "It is simply outrageous for the US authorities to suggest otherwise".
Born Steven Demetre Georgiou, he changed his name to Cat Stevens when he entered the music business.
Islam changed his name again in the 1970s after converting to the Muslim faith and largely dropping out of the music business.
He is known to have condemned the 11 September attacks in New York and Virginia as well as the latest slaughter of school children in the Russian town of Beslan.
Yusuf Islam: Crimes against
innocents are contrary to Islam
"There is no vocabulary fit to describe the gruesome cruelty of this event; watching helplessly as hundreds of children were mercilessly utilized as negotiating tokens in a political game, which they had absolutely nothing to do with, makes us ponder what kind of inhumane mentality the perpetrators had," Islam said in a statement.
"Crimes against innocent bystanders taken hostage in any circumstance have no foundation whatsoever in the life of Islam and the model example of Prophet Muhammad, peace be upon him," the singer said.
"The concept that Islam allows the taking of one person's life in exchange for another person's sin is absolutely warped, the Qur'an in fact put an end to the concept of sins being passed on from generation to generation, father to son, or from one soul to another."