Karzai spoke on Tuesday at a major anti-drugs conference in Kabul. The meeting aims to find ways to halt the spread of poppy cultivation in the Central Asian country.
"We used to think that our biggest enemy is terrorism ... but today we know that the cultivation of poppy is the main enemy of Afghanistan," he said.
The narcotics trade accounts for about a third of Afghanistan's economy. The country produces about 87% of the world's illegal heroin.
The Taliban virtually halted poppy cultivation during the last year of its rule, but since then international and Afghan efforts to wipe out the resurgent industry have failed.
In 2005, Afghanistan produced 4,100 tonnes of opium worth about $2.7 billion, according to the UN Office on Drugs and Crime.
Afghanistan exported around $2.7 billion of opium in 2005
This year the UN estimates that the number of poppy fields under cultivation has increased by 40%.
Karzai said that little had been done since Kabul's first major anti-drugs conference in 2004.
"Two years ago we had a similar conference and we don't have any results to show to the world what we have done so far," he said.
Drug trade fuelling Taliban
While governing most of Afghanistan in 2001 the Taliban effectively destroyed the opium industry in areas under its control in an effort to win UN aid money and international recognition.
But since being driven from power by the US-backed Northern Alliance there is increasing evidence that the Taliban has used Afghanistan’s drugs trade to fund its fight against Karzai's government and to win local support.
According to US army General James Jones, Nato's supreme commander, the opium trade is funding "the resurgence of the Taliban, perhaps even al-Qaeda, perhaps tribe-on-tribe warfare".
"Forced eradication has also provided a tactical advantage to the insurgency"
The Senlis Council, June 2006 report
Although the UN and international donors are spending a $1 billion a year to persuade Afghan farmers to plant other crops, because most opium is grown in remote areas outside government control, the crops are often destroyed by force.
However this policy of crop-spraying and burning of fields is backfiring, according to a June 2006 report by the Senlis Council, a France-based think tank that advocates legalising many drugs.
"Forced eradication has also provided a tactical advantage to the insurgency," the report said.
"The Taliban offer farmers protection from eradication operations in exchange for support, further strengthening their grip... There are numerous examples of Taliban mining fields to cause casualties and destruction among the eradication forces."
The report said that the forcible eradication programme has also allowed the Taliban to depict the Karzai government as the weak and powerless stooge of a foreign army of occupation.
"The population increasingly sees themselves as Muslims oppressed by Christian troops. The Taliban and other groups are focusing their propaganda on this theme in order to deepen the antagonism between the Afghan population and the international community."
A lucrative trade
But the root cause of opium farming is that poppies are more profitable than other crops.
Planting poppies will earn an Afghan farmer about $5,400 per hectare – about 10 times more than growing wheat.
Years of war have destroyed Afghanistan's economy
A 2005 survey by the UN Office on Drugs and Crime found that farmers who grow poppies are richer than those who do not.
In Helmand province, for instance, the UN interviewed 149 farmers and found that of those who grew poppies, nine per cent had a car. By comparison none of the farmers who did not grow poppies had a car.
Where the Taliban and opium meet
The intersection between rising poppy cultivation and the resurgence of the Taliban is most acute in the southern province of Helmand which produces an estimated 20% of the world's opium.
In Jaunary 2006, a Nato mission under British command took over security from US troops in Helmand. Since then more than 11 British soldiers have been killed by pro-Taliban forces there.
The losses have led some British opposition politicians to urge the government to re-think its drugs policy in Helmand, arguing that cracking down on poppy cultivation will create more support for the Taliban.
Tobias Ellwood, a Conservative party advisor said: "The poppy crops are the elephant in the room of the Afghan problem.
"We're in complete denial of the power that the crops have on the nation as a whole, and the tactics of eradication are simply not working," he told British newspaper The Guardian on July 24.
"Last year we spent £600m on eradication and all that resulted was the biggest-ever export of opium from the country," he said.
Helmand province is one of the most lawless in Afghanistan
Ellwood said that opium farming should be licensed so the harvest could be sold legally on the open market, bringing in income for Afghan farmers and helping plug a global shortage of opiate-based medicines.
Ellwood said that his proposal had the support of several senior members of Britain's parliament.
But on a August 9 visit to London, John Walters, the head of US anti-drugs policy, dismissed British concerns.
"Sometimes we talk as if security and drugs control are at odds, but the places where we have the best security are the places where we have some of the best drugs control," he said.
"[Afghan farmers] know that their future and that of Afghanistan depends on rule of law, not being ruled by drug mafias," he said.
The UN Office on Drugs and Crime will issue its 2006 report on the Afghan drugs trade on September 12.