Former Prime Minister Tony Blair has described events in Egypt as a "pivot" that could move the "whole of the Middle East" towards democracy.
Mr Blair, who is now a UN Middle East peace envoy, said deposed President Hosni Mubarak had been "a force for stability in the region".
But events in Egypt were a "huge opportunity" for change.
It comes as Vince Cable warned UK banks against "improperly" helping Mr Mubarak protect his personal fortune.
Mr Blair used an interview with BBC1's Andrew Marr Show to call for greater "engagement" by Western powers in the Middle East and to warn against "hysteria" about the Muslim Brotherhood.
Some US conservatives have warned that the Islamist group, which is Egypt's largest opposition party, could take over the country and end its peace treaty with Israel, with consequences for the whole region.
But Mr Blair said the "sensible" approach to the Muslim Brotherhood in Egypt was "not to be hysterical about them," adding "they are not terrorists or extremists".
But he also said the international community should "not be complacent" about the Muslim Brotherhood either, adding they are "not the type of political party that you or I would recognise".
Above all, he said the West had to move from "commentating on this situation" to "engaging" with what he said was a wider process of change across the Middle East.
Mr Blair, who along with the US, was a close ally of President Mubarak when he was in power, said that although he had been a force for stability who had boosted Egypt's economy, forces for change in Egypt had been "held back" under his rule.
Mr Blair told Andrew Marr: "This is a moment of huge opportunity, not just for Egypt, and ... although I see all the uncertainties, you have to manage this process of change very carefully, I think the military council will do that, by the way.
"Despite all those challenges, this is a moment when the whole of the Middle East could pivot and face towards change and modernisation and democracy and that would be a huge benefit for all of us."
He acknowledged the situation in Egypt had been "fantastically destabilising" for the Palestinian Authority but added that if a "benign" new administration was established in Cairo it could help to support modernising elements within Palestinian politics.
Mr Blair said the Middle East "can either go towards an open-minded, modern type of democracy, let's hope that it does, or it could be swung into something narrow and extreme and closed-minded".
He added: "I think there's every possibility that we get the first and not the second and our purpose as the West should be to engage insofar as possible to bring about that more benign scenario."
Speaking later to the BBC News channel, Mr Blair said it was "conceivable" that Egypt could now end its peace treaty with Israel but the judgement of the "majority" of people he had spoken to in Egypt was that it would remain as it had delivered peace.
It comes as the government faced calls to freeze any assets of Mr Mubarak's assets being held in the UK.
Business Secretary Vince Cable said that there was a need for "concerted international action" to tackle the issue.
He said he was "not aware" whether Mr Mubarak had "enormous assets" in the UK but warned the government would act against any British bank that was involved in helping the former president improperly move funds in order to protect his private wealth.
Mr Mubarak is reported to have amassed a family fortune worth billions of dollars held in British and Swiss banks and tied up in property in London, New York and Los Angeles.
The Swiss authorities have already announced that they are freezing his assets held in their country.
The director of the Serious Fraud Office, Richard Alderman, indicated that they were already tracking the assets of Mr Mubarak and the deposed Tunisian president Zine El Abidine Ben Ali.
"The public would expect us to be looking for some of this money if we became aware of it, and to try to repatriate it for the benefit of the people of those countries," he told The Sunday Times.
Shadow foreign secretary Douglas Alexander, for Labour, said: "The government should immediately request the Serious Fraud Office investigate what assets Mubarak holds in Britain.
"Britain must be ready to act swiftly in response to any request received from the Egyptian or International authorities to freeze wrongly appropriated assets.
"At least 20% of the Egyptian population live below its poverty line of $2 a day. We should play our part in ensuring that any money which rightly belongs to the Egyptian people is returned to them."