In 1970, Izetbegović published a manifesto entitled the Islamic Declaration, expressing his views on relationships between Islam, state and society. The authorities interpreted the declaration as a call for introduction of Sharia law in Bosnia, and banned the publication. The declaration remains a source of controversy. It was used by Serb nationalists as one of the excuses for the war, often quoting the declaration as an intent to create an Iranian style Muslim republic in Bosnia. Passages from the declaration were frequently quoted by Izetbegović's opponents during the 1990s, portraying it as an open statement of Islamic fundamentalism. The opinion is shared by some Western authors such as John Schindler. Izetbegović vigorously denied such accusations. British author Noel Malcolm asserted that the Serb nationalist interpretation of the Declaration was false propaganda and offered a more benevolent reading of the declaration. Explaining that it was "a general treatise on politics and Islam, directed towards the entire Muslim world; it is not about Bosnia and does not even mention Bosnia" and that "none of these points can be described as fundamentalist." Malcolm argues that Izetbegović's views were much more thoroughly expressed in his later book, Islam between East and West, where he "tried to present Islam as a kind of spiritual and intellectual synthesis which included the values of West Europe."

Izetbegović wrote what is however regarded as his central work, the book Islam between East and West, in 1980. It explores the notion that "Islam is the only synthesis capable of unifying mankind's essentially dualistic existence".

In April 1983, Izetbegović and twelve other Bosniak activists (including Melika Salihbegović, Edhem Bičakčić, Omer Behmen, Mustafa Spahić and Hasan Čengić) were tried before a Sarajevo court for a variety of offences, principally hostile activity inspired by Muslim nationalism, association for purposes of hostile activity and hostile propaganda. Izetbegović was further accused of organizing a visit to a Muslim congress in Iran. All of those tried were convicted and Izetbegović was sentenced to fourteen years in prison. The verdict was strongly criticised by Western human rights organisations, including Amnesty International and Helsinki Watch, which claimed that the case was based on "communist propaganda", and the accused were not charged with either using or advocating violence. The following May, the Bosnian Supreme Court conceded the point with an announcement that "some of the actions of the accused did not have the characteristics of criminal acts" and reduced Izetbegović's sentence to twelve years. In 1988, as communist rule faltered, he was pardoned and released after almost five years in prison. His health had suffered serious and lasting damage.

The introduction of a multi-party system in Yugoslavia at the end of the 1980s prompted Izetbegović and other Bosniak activists to establish a political party, the Party of Democratic Action (Stranka Demokratske Akcije, SDA) in 1989. It had a largely Muslim character; similarly, the other principal ethnic groups in Bosnia, the Serbs and Croats, also established ethnically based parties. (The Communist Party renamed itself the Party of Democratic Changes.) The SDA won the largest share of the vote, 33% of the seats, with the next runners-up being nationalist ethnic parties representing Serbs and Croats. Fikret Abdić won the popular vote for president among the Bosniak candidates, with 44% of the vote, Izetbegović closely behind with 37%. According to the Bosnian constitution, the first two candidates of each of the three constitutient nations would be elected to a seven member multi-ethnic rotating presidency (with two Croats, two Serbs, two Bosniaks and one Yugoslav); a Croat took the post of prime minister and a Serb the presidency of the Assembly. Abdić agreed to stand down as the Bosniak candidate for the Presidency and Izetbegović became President.

Bosnia's power-sharing arrangements broke down very quickly as ethnic tensions grew after the outbreak of fighting between Serbs and Croats in neighboring Croatia. Although Izetbegović was due to hold the presidency for only one year according to the constitution, this arrangement was initially suspended due to "extraordinary circumstances" and was eventually abandoned altogether during the war as the Serb and Croat nationalistic parties SDS and HDZ abandoned the government. When fighting broke out in Slovenia and Croatia in the summer of 1991, it was immediately apparent that Bosnia would soon become embroiled in the conflict. Izetbegović initially proposed a loose confederation to preserve a unitary Bosnian state and strongly urged a peaceful solution. He did not subscribe to the peace at all costs view and commented in February 1991 that I would sacrifice peace for a sovereign Bosnia - Herzegovina ... but for that peace in Bosnia - Herzegovina I would not sacrifice sovereignty. By the start of 1992 it had become apparent that the rival nationalist demands were fundamentally incompatible: the Bosniaks and Croats sought an independent Bosnia while the Serbs wanted it to remain in a rump Yugoslavia dominated by Serbia. Izetbegović publicly complained that he was being forced to ally with one side or the other, vividly characterising the dilemma by comparing it to having to choose between leukaemia and a brain tumour.

In January 1992, Portuguese diplomat José Cutileiro drafted a plan, later known as the Lisbon Agreement, that would turn Bosnia into a triethnic cantonal state. Initially, all three sides signed up to the agreement; Izetbegović for the Bosniaks, Radovan Karadžić for the Serbs and Mate Boban for the Croats. Some two weeks later, however, Izetbegović withdrew his signature and declared his opposition to any type of division of Bosnia, supposedly encouraged by Warren Zimmermann, the United States Ambassador to Yugoslavia at the time.

In February 1992, Izetbegović called a national referendum on independence for Bosnia as a European condition for recognition of Bosnia as an independent state, despite warnings from the Serbian members of the presidency that any move to independence would result in the Serbian inhabited areas of Bosnia seceding to remain with the rump Yugoslavia. The referendum was boycotted by Serbs, who regarded it as an unconstitutional move, but achieved a 99.4% vote in favour on a 67% turnout (which almost entirely constituted of the Bosniak and Croat communities). The Bosnian parliament, already vacated by the Bosnian Serbs, formally declared independence from Yugoslavia on February 29 and Izetbegović announced the country's independence on March 3. It did not take effect until 7 April 1992, when the European Union and United States recognised the new country. Sporadic fighting between Serbs and government forces occurred across Bosnia in the run-up to international recognition. Izetbegović appears to have gambled that the international community would send a peacekeeping force upon recognising Bosnia in order to prevent a war, but this did not happen. Instead, war immediately broke out across the country as Serb and Yugoslav Army forces took control of large areas of Bosnia against the opposition of poorly equipped government security forces.

Initially the Serb forces attacked non-Serb civilian populations in Eastern Bosnia. Once towns and villages were securely in their hands, the Serb forces - the military, the police, the paramilitaries and, sometimes, even Serb villagers – applied the same pattern: Bosniak houses and apartments were systematically ransacked or burnt down, Bosniak civilians were rounded up or captured, and sometimes beaten or killed in the process. Men and women were separated, with many of the men detained in the camps. The women were kept in various detention centres where they had to live in intolerably unhygienic conditions, where they were mistreated in many ways including being raped repeatedly. Serb soldiers or policemen would come to these detention centres, select one or more women, take them out and rape them.

Izetbegović consistently promoted the idea of a multi-ethnic Bosnia under central control, which in the circumstances seemed a hopeless strategy. The Bosnian Croats, disillusioned with the Sarajevo government and supported militarily and financially by the Croatian government, increasingly turned to establishing their own ethnically based state of Croatian Republic of Herzeg - Bosnia in Herzegovina and Central Bosnia. The Croats pulled out of the Sarajevo government and fighting broke out in 1993. In most areas local armistices were signed between the Serbs and Croats (Kreševo, Vareš, Jajce). Croat forces started their first attacks on Bosniaks in Gornji Vakuf and Novi Travnik, towns in Central Bosnia on June, 1992, but the attacks failed. The Graz agreement caused deep division inside the Croat community and strengthened the separation group, which led to the Lašva Valley ethnic cleansing campaign against Bosniak civilians. The campaign planned by the self-proclaimed Croatian Community of Herzeg - Bosnia's political and military leadership from May 1992 to March 1993 and erupting the following April, was meant to implement objectives set forth by Croat nationalists in November 1991. Adding to the general confusion, Izetbegović's former colleague Fikret Abdić established an Autonomous Province of Western Bosnia in parts of Cazin and Velika Kladuša municipalities in opposition to the Sarajevo government and in cooperation with Slobodan Milošević and Franjo Tuđman. Abdić's faction was eventually routed by the Bosnian Army. By this time, Izetbegović's government controlled only about 25% of the country and represented principally the Bosniak community.

For three and a half years, Izetbegović lived precariously in a besieged Sarajevo surrounded by Serb forces. He denounced the failure of Western countries to reverse Serbian aggression and turned instead to the Muslim world, with which he had already established relations during his days as a dissident. The Bosnian government received money and arms. Following massacres on Bosnian Muslims by Serb and, to a lesser extent, Croat forces, Arab volunteers came across Croatia into Bosnia to join the Bosnian Army. They were organized into detachment called El-Mudžahid. The number of the El-Mudžahid volunteers is still disputed, from around 300 to 1,500. These caused particular controversy: foreign fighters, styling themselves mujahiddin, turned up in Bosnia around 1993 with Croatian identity documents and passports. They quickly attracted heavy criticism amplified by Serbian and Croatian propaganda, who considered their presence to be evidence of violent Islamic fundamentalism at the heart of Europe. However, the foreign volunteers became unpopular even with many of the Bosniak population, because the Bosnian army had thousands of troops and had no need for more soldiers (especially controversial ones who could undermine their reputation as a defending army), but for arms. Many Bosnian Army officers and intellectuals were suspicious regarding the foreign volunteers arrival in central parts of the country, because they came from Split and Zagreb in Croatia, and were passed through the self-proclaimed Croatian Community of Herzeg - Bosnia without problems unlike Bosnian Army soldiers who were regularly arrested by Croat forces. According to general Stjepan Šiber, the highest ranking ethnic Croat in Bosnian Army, the key role in foreign volunteers arrival was played by Franjo Tuđman and Croatian counter intelligence underground with the aim to justify involvement of Croatia in Bosnian War and mass crimes committed by Croat forces. Although Izetbegović regarded them as symbolically valuable as a sign of the Muslim world's support for Bosnia, they appear to have made little military difference and became a major political liability. The entity defence minister of the Federation of Bosnia and Herzegovina, Hasan Čengić, was closely associated with Iran and his dismissal in 1996 was a major US demand/condition for the funding and equipping of the Bosnian Federation Army.

In mid 1993, Izetbegović agreed to a peace plan that would divide Bosnia along ethnic lines but continued to insist on a unitary Bosnia government from Sarajevo and on the allocation to the Bosniaks of a large percentage of Bosnia's territory. The war between the Bosniaks and Croats was eventually ended by a truce brokered with the aid of the Americans in March 1994, following which the two sides collaborated more closely against the Serbs. From around this time onwards, NATO became increasingly involved in the conflict with occasional "pinprick" bombings conducted against the Bosnian Serbs, generally following violations of ceasefires and the no-fly zone over Bosnia. The Bosnian Croat forces benefited indirectly from the military training given to the Croatian Army by the American military consultancy Military Professional Resources, Inc. In addition, the Croatians provided considerable quantities of weaponry to the Bosnian Croats and much smaller amounts to the Bosnian Army, despite a UN weapons embargo. Most of the Bosnian Army's supply of weapons was air-lifted from the Muslim world, specifically Iran - an issue which became the subject of some controversy and a US congressional investigation in 1996.

In September 1993, the Congress of Bosniak Intellectuals (Drugi bošnjački sabor) officially re-introduced the historical ethnic name Bosniaks instead of the previously used Muslim in former Yugoslavia. The Yugoslav Muslim by nationality policy was considered by Bosniaks to be neglecting and opposing their Bosnian identity because the term tried to describe Bosniaks as a religious group not an ethnic one. To quote Bosnian politician and president Hamdija Pozderac: "They don't allow Bosnianhood but they offered Muslimhood. We shall accept their offer, although the name is wrong, but with it we'll start the process." In discussion with Josip Broz Tito (1971).

In August 1995, following the Srebrenica massacre, NATO launched an intensive two week bombing campaign which destroyed the Bosnian Serb command and control systems. This allowed the Croatian and Bosniak forces to overrun many Serb-held areas of the country, producing a roughly 50/50 split of the territory between the two sides. The offensive came to a halt not far from the de facto Serb capital of Banja Luka. When the Croat and Bosniak forces stopped their advance they had captured the power plants supplying Banja Luka's electricity and used that control to pressure the Serb leadership into accepting a cease fire.

The parties agreed to meet at Dayton, Ohio to negotiate a peace treaty under the supervision of the United States. Croatian and Serbian interests were represented by President Tuđman and President Milošević respectively. Izetbegović represented the internationally recognised Bosnian Government. Izetbegovic's intent was to continue the war, and continued to arm even afterwards, although lack of US support put a stop to this.

After the Bosnian War was formally ended by the Dayton peace accord in November 1995, Izetbegović became a Member President of Presidency of Bosnia and Herzegovina. His party's power declined after the international community installed a High Representative to oversee the affairs of state, with more power than the presidents or parliaments of either the Bosniak - Croat or Serb entities. He stepped down in October 2000 at the age of 74, citing his bad health. However, Izetbegović remained popular with the Bosniak public, who nicknamed him Dedo (which in Bosnian means granpa). His endorsement helped his party to bounce back in the elections of 2002.

He died in October 2003 of heart disease complicated by injuries suffered from a fall at home.

Alija Izetbegović died in October 2003 in Sarajevo. Following his death there was a drive to rename a part of the main street of Sarajevo from Ulica Maršala Tita (Marshall Tito Street) and the Sarajevo International Airport in his honour. Following objections from politicians from Republika Srpska, the international community, and UN envoy Paddy Ashdown, both initiatives failed. His grave at the Kovači cemetery in Sarajevo was badly damaged by a bomb on the morning of 11 August 2006. The identity of the bomber or bombers has not been determined.

French philosopher Bernard-Henri Lévy described Izetbegović's wartime career in a favorable documentary called Bosna!

In October 2006, his son Bakir (born 1956) was elected to a four-year term in the Parliament of Bosnia and Herzegovina as a representative of the SDA. Four years later, in October 2010, he too was elected to the Presidency as the Bosniak member.

Serb nationalists and institutions twice petitioned the ICTY to indict him on war crimes and other charges. An ICTY investigation of Izetbegović was started, but terminated when he died.