* Evolving Islamic State strategy
* Group was focused on caliphate in Iraq and Syria
* Abundance of foreign fighters could be deadly weapon (Adds Obama comments)
By Michael Georgy and Mariam Karouny
BAGHDAD/BEIRUT Aug 20 (Reuters) - Islamic State's beheading of a U.S. journalist and its threat to "destroy the American cross" suggests it has gained enough confidence seizing large areas of Iraq and Syria to take aim at American targets despite the risks.
On Tuesday night, Islamic State released a video of its fighters beheading James Foley, who was kidnapped in Syria nearly two years ago.
The black-clad executioner, who spoke English with a British accent, also produced another American journalist and said his fate depends on President Barack Obama's next move.
Islamic State had previously seemed focused on proclaiming a caliphate in the parts of Iraq and Syria it controls, marching on Baghdad and redrawing the map of the Middle East.
But in several telephone conversations with a Reuters reporter over the past few months, Islamic State fighters had indicated that their leader, Iraqi Abu Bakr al-Baghdadi, had several surprises in store for the West.
They hinted that attacks on American interests or even U.S. soil were possible through sleeper cells in Europe and the United States.
"The West are idiots and fools. They think we are waiting for them to give us visas to go and attack them or that we will attack with our beards or even Islamic outfits," said one.
"They think they can distinguish us these days - they are fools, and, more than that, they don't know we can play their game in intelligence. They infiltrated us with those who pretend to be Muslims and we have also penetrated them with those who look like them."
Another Islamic State militant said the group had practical reasons for taking on the United States.
"The stronger the war against the States gets, the better this will help hesitant brothers to join us. America will send its rockets, and we will send our bombs. Our land will not be attacked while their land is safe."
Unlike al Qaeda, Islamic State did not at first seem bent on spectacular attacks on the West: it used fear to tighten its grip on the towns it seized in northern Iraq after facing little resistance from the U.S.-trained Iraqi army and Kurdish peshmerga fighters who held parts of the area.
But a series of videos it released recently, culminating with the one that showed Foley's death, resembled footage that al-Qaeda produced while killing U.S. soldiers, beheading Americans and slaughtering Shi'ites during the U.S. occupation.
The videos followed the first U.S. air strikes in Iraq - targeting Islamic State militants - since American forces withdrew from the country in 2011.
It seems clear that Islamic State is raising the stakes, aware that the gruesome death of an American and the image of another one at the mercy of an executioner who is taunting a U.S. president could invite retaliation - heavier air strikes at least.
Responding to the killing, U.S. President Barack Obama condemned Islamic State as a "cancer" and said "their ideology is bankrupt".
He said the United States would continue to do "what we must do to protect our people".
The Islamic State's new front may be a way of improving its jihad credentials and attracting more followers and prestige in an Islamist militant world where taking on the "infidel" United States is almost an article of faith.
Perhaps the most telling video was one released just before Foley was shown in an orange jumpsuit to remind Americans that Islamic militants are still angry at the treatment of Muslims at Guantanamo Bay, where detainees had to wear the same outfit.
The earlier video suggested Islamic State was gearing up for an existential holy war between the caliphate and the crusader America, with the threat to destroy "The American Cross".
In one scene an American soldier weeps after losing a comrade and the Christian hymn "Amazing Grace" can be heard. In another, there is heavy breathing from the Star Wars movie character Darth Vader.
Reacting to the video, Iraqi Foreign Minister Hoshiyar Zebari called on the international community to help his country battle the "savage" Islamic State.
But the United States and other Western powers may now be diverting their attention away from the Sunni insurgents in northern Iraq to what they are capable of doing overseas.
The group can draw on hundreds if not thousands of foreigners with Western passports that can keep them below the radar, like the British-sounding man who appeared to have killed Foley, to carry out its threats.
Masrour Barzani, head of the Kurdish region's National Security Council, recently told Reuters he was concerned about Islamic State sleeper cells in the semi-autonomous Kurdish region in the north.
But he seemed equally anxious about a broader problem.
"Many of the members of (Islamic State) that have come from abroad have come from Europe, from the U.S., from the Middle East and North Africa - all over the world," said Barzani.
"These are people that are not going to die in battles in Iraq and Syria. Many of these people will go back to their countries of origin, becoming potential leaders or terrorist operatives, which could really become a bigger threat to their own countries."
Western countries are well aware of the issue - nine people suspected of planning to join Islamist militants in Syria were detained in Austria on Wednesday.
"We are absolutely aware that there are significant numbers of British nationals involved in terrible crimes, probably in the commission of atrocities, making Jihad with (Islamic State) and other extremist organisations," British Foreign Secretary Philip Hammond told the BBC.
"I don't think this video changes anything. It just heightens awareness of a situation which is very grave and which we've been working on for several months."
Jamal Khashoggi, a long-time expert on al Qaeda who interviewed Osama bin Laden, said caution and concerns over security may have kept Islamic State from carrying out attacks on Western targets so far, but they would not hesitate under the right conditions.
"If they can blow up a suicide bomber in Times Square this afternoon they'll do it. What is keeping them from doing that is vigilance and security," he said.
"But we have to admit that they are targeting all of us. If they can launch a terrorist attack in Riyadh, New York or London, they'll do that." (Additional reporting by Yara Bayoumy in Dubai, Costas Pitas in London and Isabel Coles in Arbil; Writing by Michael Georgy; Editing by Giles Elgood and Will Waterman)