He also said mosques were increasingly being used by imams to deliver sermons that were not open to discussion.
Dr Ali said the majority of Muslim clerics had for centuries imposed a “literalist” teaching of Islam, telling their followers that deviating from the written message would ultimately lead to their admission into hell.
“The times are changing and with the change of times, you also have to reinterpret the Koran,” he told The Australian.
“Because if you believe that it’s a book for all the times and all the nations, then that book must be yielding new meanings.
“There are verses about slavery, and the Koran says you must be kind to the slaves. So are the Muslims saying we must have slavery to be kind?
“The jihadists are interpreting the Koran literally and that’s the problem … Popular Muslims, because of their lack of knowledge about religion, are vulnerable to these sort of teachings.”
Dr Ali, who is writing an academic paper entitled Closing of the Muslim Mind, said even Mohammed was not the “perfect model” as most Muslims believed.
Asked if the prophet had character flaws, he said: “Of course — you must look at him as a human being also.”
His call for moderation comes 11 days into Ramadan, the holy month that requires Muslims to fast, give to charity and become more spiritually accountable.
His comments came as a French philosophy teacher was forced into hiding after describing the Mohammed as a ruthless warlord and mass murderer.
Robert Redeker has been under police protection, moving between secret addresses, since threats against him appeared on Islamist websites last week.
His home address was published with calls to murder.
Dr Ali criticised community members for playing victim when Muslims reacted violently against criticism, as after the publication of the Danish cartoons and the recent comments by the Pope.
He said it was time for Muslims to “confront this challenge head-on and look critically at their behaviour and mode of response to alleged blasphemy”.
Dr Ali called for Hezbollah to be removed from the Government’s terror organisations list two months ago, saying they were freedom fighters defending their country against Israeli invasion.
The former president of the Australian Federation of Islamic Councils said there were sections of the Koran that were relevant to “everybody at every time”.
But he said people needed to read into the scripture and not merely accept it as the final word.
Dr Ali — who heads the Muslim Community Reference Group set up last year following the London bombings to improve communication channels between the Federal Government and Australia’s 300,000 Muslims — labelled the idea of going to hell for questioning the Koran a “load of rubbish”.
“Because we cannot decide who’s going to go to hell and who’s going to go to heaven — that’s left to the creator,” he said.
Dr Ali criticised Muslims who react violently towards any depictions of Mohammed while aspiring to emulate his ways.
“True, Islam prohibits any drawing or a statue to be carved out representing the figure of the prophet.
Still, it has not prevented the Muslims from imitating the physical features of Mohammed,” he said.
Dr Ali said it was “ridiculous” that some Muslims believed God would judge them on the “length of (their) beard”.
He said Muslims would be judged on their “character, their knowledge, their contribution to society”.
He said young Muslim Australians were slowly becoming more inquisitive about their faith.
“Therefore they are going to ask questions when they grow up and that’s a healthy trend,” he said.