Australian investment in Pakistan would provide jobs and build industries, helping ease the poverty which drives people into militant groups, he said.
"When you assist us in our industry you are indirectly assisting us in fighting terrorism," Musharraf told an Australian Press Club lunch in Canberra.
Pakistan, with its long and rugged border with Afghanistan, is on the frontline in the war against terror and is probably home to al Qaeda leader Osama bin Laden, Musharraf said.
However, security forces had apprehended, eliminated or deported more than 700 suspected al Qaeda members and had effectively broken the back of the organisation by destroying mountain hide-outs and communications hubs, he said.
"No other country in the world has done what Pakistan has done," Musharraf said. "We occupied their sanctuaries and they are now on the run in the mountains.
"I believe, in Pakistan, al Qaeda today ceases to exist as a homogenous entity with good command and control."
But Canberra remains concerned about links between al Qaeda or other Pakistan-based militant movements and Islamic radicals in Southeast Asia, including Australia.
Three of the four people facing terror charges in Australia are believed to have trained in Pakistan.
Intelligence-sharing on Australians suspected of involvement in militant training camps in Pakistan is thought to be a key element of a counter-terrorism agreement expected to be signed by Musharraf and Prime Minister John Howard when they meet on Wednesday.
Musharraf, who said he was not in favour of Australia sending troops to Afghanistan to fight insurgents, said Canberra could assist Pakistan by exporting its expertise in dairy production, mining and exploration, fruit processing, livestock and agriculture.
In 2004 Australia exported 500 million dollars (380 million US) worth of mainly wheat and oil seeds to Pakistan but only imported 155 million dollars of textiles and cotton from that country, according to government figures.
In a wide-ranging speech, Musharraf said that there should be no divisions between the Muslim world and the west.
He suggested that if the West had been more engaged with the Taleban regime, which harboured bin Laden, perhaps the terror war could have been avoided.
"I often wonder now, with hindsight, if my pleas to recognise the Taleban and try to change them from within had been accepted ... maybe even the 9/11 (attacks on the US) could have been avoided," he said.
Howard, who will visit India next month, will also be extended an invitation to visit Pakistan, Musharraf said.
KASHMIR DISPUTE: Musharraf expressed the optimism that a resolution to Kashmir dispute acceptable to Pakistan, India and the people of Kashmir, could be achieved through flexibility and sincerity.
He called for settlement of the decades-old dispute within the tenures of current leadership of the two South Asian nations.
"I don't have a strict timeframe in my mind, but both the countries should seize the peace opportunity - and in view of harmony and understanding between the current leadership (Prime Minister Manmohan Singh and himself), the Kashmir dispute should be resolved within our tenures," he said.
The president said there was no guarantee that the future leadership of both the countries would have the same level of harmony and understanding.
He said both the countries have to move from dispute management to dispute resolution, as longstanding issues can no longer be pushed under the carpet.
Referring to Pakistan-India peace process, the president said it had resulted in a new environment of improved relations and better confidence between both the countries.
"Both the sides need to seize the opportunity, show sincerity, courage and flexibility and reach a final settlement that is acceptable to all the three stakeholders - Pakistan, India and the Kashmiri people. I proceed with optimism and am convinced that such a solution is achievable."
He said that Pakistan and India are moving on two tracks - confidence-building measures and conflict resolution - and stressed the two must move in tandem.
The world community, he said, could make a critical contribution in dispute resolution by encouraging all the sides to remain on course to reach the destination and called upon Australia to do the same.
President Musharraf said with its strategic location Pakistan was committed and playing its destined role for peace, stability and development in the world.
He saw a role for Pakistan as a moderate, progressive Islamic country true to the vision of its founding father that can also be a bridge of understanding between the Islamic societies and the West.
He said Pakistan was strategically placed at the crossroads of South Asia, landlocked but energy-rich Central Asia, the Western parts of China and the Gulf region.
NON-PROLIFERATION: The president reiterated Pakistan's firm commitment to nuclear non-proliferation, strongly ruling out any possibility of its strategic assets falling into wrong hands.
"Pakistan has developed a strong command and control system to safeguard and protect its strategic assets - Pakistan is a responsible state and has a national command authority in place - so the question of our assets falling into wrong hands does not arise," he said. He said that Pakistan is opposed to nuclear proliferation and has no interest in the spread of nuclear weapons in the world.
President Musharraf, who also entertained questions from newsmen during his over one-hour interaction, said Pakistan has effectively addressed the issue of proliferation by scientist Dr Abdul Qadeer Khan, adding that it was the act of an individual and the government was not involved in any way.
The world should understand that Pakistan developed its nuclear capability for self-defence in response to the threat posed to its security by India's nuclearisation, he added. However, he also said that balance in the conventional field ensures peace and stability in the region.
The president said Pakistan is committed to de-nuclearisation of South Asia and reduction in forces, but stressed that it could not be done unilaterally.
Pakistan, he said, is engaged with the international export control regime to ensure nuclear non-proliferation across the world.
Pakistan is committed to the Bonn process and has contributed significantly to reconstruction and rehabilitation efforts in Afghanistan, he added.
DEMOCRACY: He said his government has introduced sustainable democracy in Pakistan, which was evident from the empowerment of people at the grassroots level and unprecedented freedom of expression in the media.
He said that women have been empowered and given representation at all tiers of the government. The minorities also enjoy full rights and joint electorate system.
The essence of democracy was freedom of expression and today Pakistan has a dozen private TV channels voicing a variety of views, he said.