Addressing a forum on Wednesday, Clinton cited the lack of planning for what would happen after Saddam Hussein was overthrown.
"Saddam is gone. It's a good thing, but I don't agree with what was done," Clinton told students at the American University of Dubai.
"It was a big mistake. The American government made several errors ... one of which is how easy it would be to get rid of Saddam and how hard it would be to unite the country."
Clinton was taking questions on the US invasion of Iraq, which began in March 2003. His response drew cheers, and a standing ovation at the end of the hour-long session.
Clinton said the US had done some good things in Iraq: the removal of Saddam, the ratification of a new constitution, and the holding of parliamentary elections.
Borders left open
"The mistake that they made is that when they kicked out Saddam, they decided to dismantle the whole authority structure of Iraq... We never sent enough troops and didn't have enough troops to control or seal the borders," said Clinton.
As the borders were unsealed, "the terrorists came in".
Clinton said it would have been better if the US had left Iraq's "fundamental military and social and police structure intact".
Clinton was critical of the
post-Saddam chaos in Iraq
His remarks came a day after Defence Secretary Donald Rumsfeld quoted officials from Clinton's 1992-2000 administration as saying that Saddam was a security threat to the United States and its allies.
At a Pentagon news conference on Tuesday, Rumsfeld noted that the Iraq Liberation Act that Congress passed in 1998 had said it should be US government policy to support Saddam's removal from power. He noted that Clinton signed the act and ordered four days of bombing in December 1998.
Rumsfeld's comment was part of the response of President George Bush's administration to Democratic party criticism of the war.
Recent opinion polls have showed Bush's approval ratings, and support for the war in Iraq, plummeting to the lowest points of his presidency.
Gaza deal praised
Turning to the Palestinian-Israeli conflict, Clinton praised Tuesday's agreement to open Gaza's borders from 25 November as a "a good beginning", but called on the world to invest in the impoverished coastal area.
"Saddam is gone. It's a good thing, but I don't agree with what was done"
Former US president
"There should be a serious attempt by the governments in Europe and the United States and elsewhere to invest in Gaza. We gotta make Gaza work," said Clinton.
The deal gives Palestinians control over their borders for the first time, allowing them to travel freely into Egypt and to export their goods. Israel will be able to see who comes and goes, with the help of European monitors, but Palestinians will retain final authority.