Brigadier Ijaz Shah, a long-term close associate of former military ruler Gen Pervez Musharraf, was the "most important and all-powerful person" in his regime, General Butt said in a television interview.
A Pak brigadier has given shelter to Osama and Musharraf was well aware of it. "I fully believe that Ijaz Shah had kept this man (Osama bin Laden, in Abbottabad) with the full knowledge of Pervez Musharraf," General Butt was quoted as saying by the Sydney Morning Herald newspaper.
Shah was the Intelligence Bureau chief during Musharraf's rule and is believed to be the ISI handling officer of the British-born terrorist Omar Sheikh, convicted for the murder of Wall Street Journal reporter Daniel Pearl.
Butt, the former chief of directorate of Inter-Services Intelligence or ISI, alleged that Shah harboured the world's most wanted criminal for years, at the same time that other arms of the Pakistani military and the US were hunting him.
He said the Abbottabad compound where bin Laden was killed by US special forces in a covert raid on May 2 last year was built on Brigadier Shah's orders.
But Brigadier Shah said the allegations were groundless. "Not only do I reject it, but any sensible man in the world will reject this allegation," he said.
Shah said in more than a year since bin Laden's death, no evidence had been produced that he was harbouring him or knew of his whereabouts. "The whole world has been looking to see who knew about this, but they have not found any proof."
Shah reportedly left Pakistan for Australia after the assassination of former Pakistani premier Benazir Bhutto. Bhutto had alleged Shah was conspiring with terrorists to assassinate her, naming him in a letter as someone who should be investigated if she died.
Shah was in charge of Bhutto's security detail, which failed to protect her, on the night she was killed in 2007.
In 2004, President Musharraf nominated him to be High Commissioner to Australia. He was rejected by Canberra, it is understood, out of concern over his links to terrorists.