The Boko Haram, based in the north-eastern city of Maiduguri, says it is fighting for Islamic rule.
It has been behind recent assassinations of prominent figures and a wave of bombings.
Two years ago, Nigeria's security forces brutally suppressed an uprising by the sect, destroying its compound in Maiduguri - the capital of Borno state - and then capturing and killing its leader Mohammed Yusuf.
Instead of disappearing, the group, which opposes Western education and is fighting for Islamic rule, re-emerged last September and vowed to avenge its leader's death.
Last month, it said it had carried out an attack on the headquarters of the Nigerian police in Abuja, which killed at least six people.
Boko Haram: Timeline of terror
- 2002: Founded
- 2009: Hundreds killed when Maiduguri police stations stormed
- 2009: Boko Haram leader Mohammed Yusuf captured by army, handed to police, later found dead
- Sept: 2010: Freed hundreds of prisoners from Maiduguri jail
- December 2010: Bombed Jos, killing 80 people and blamed for New Year's Eve attack on Abuja barracks
- 2010-2011: Dozens killed in Maiduguri shootings
- May 2011: Bombed several states after president's inauguration
- June 2011: Police HQ bombed
- June 2011: 25 people killed in attack on bar
- July 2011: Motorbikes banned in Maiduguri to prevent drive-by shootings
- July 2011: Thousands of residents flee Maiduguri after a series of attacks
"That problem can never be solved by drafting soldiers into cities where there is [a] problem - and in the process innocent lives were lost," said the sultan, who once served as military officer.
It is the first time the sultan has spoken about the Boko Haram insurgency.
Muslim clerics who have criticised the sect have been among those targeted for assassination in drive-by shootings over the past year.
The sultan also said the five policemen who have just gone on trial this month for the killing of Mr Yusuf should not be given bail.
Boko Haram's official name is Jama'atu Ahlis Sunna Lidda'awati wal-Jihad, which in Arabic means "People Committed to the Propagation of the Prophet's Teachings and Jihad".
But residents of Maiduguri, where it was formed in 2002, dubbed it Boko Haram.
Loosely translated from the local Hausa language, this means Western education is forbidden.
Boko Haram sees such education as corrupting Muslims.
Nigeria - Africa's most populous nation - is split between the predominately Muslim north and largely Christian south.