Mohamed Abdullah/Reuters
Authorities examine a chemical weapon sample in Syria.
In an interview with The Sunday Times, Wallace said the terrorist group wants to build on chemical attacks in Syria by bringing the weapons to Europe.
He pointed to a foiled plot in February 2016 in Morocco where weapons were being created by an ISIS cell to cause mass casualties.
"Moroccan authorities dismantled a cell involving chemical weapons," Wallace explained. "They recovered toxic chemical and biological substances and a large stock of fertiliser. The substances found could have been used to produce homemade explosives and could have been transformed into a deadly toxin."
The Security Minister added: "The ambition of IS [Islamic State] or Daesh is definitely mass-casualty attacks. They want to harm as many people as possible and terrorise as many people as possible.
"They have no moral objection to using chemical weapons against populations and, if they could, they would in this country. The casualty figures that could be involved would everybody's worst fear. We have certainly seen reports of them using it in Syria and Iraq [and] we have certainly seen aspirations for it in Europe."
Wallace told The Sunday Times that UK security chiefs have carried out exercises to prepare for a chemical attack, which he described as the country's "worst fear."