UK could work with Taliban in Afghan govt: defence secretary
"Whatever the government of the day is, provided it adheres to certain international norms, the UK Government will engage with it," he told the Daily Telegraph.
"Just like other governments around the world, if they behave in a way that is seriously against human rights, we will review that relationship.
"All peace processes require you to come to terms with the enemy. Sometimes, that's what it is."
Wallace's comments, delivered in an interview with the Telegraph during a visit to the United States, came as the hardline Islamist group has swept through much of Afghanistan in recent months.
It said Wednesday fighters had captured a strategic border crossing along the frontier with Pakistan, continuing gains made since foreign forces stepped up their withdrawal from the country after nearly two decades there.
The Afghan government now holds little more than a constellation of provincial capitals that must largely be resupplied by air.
Wallace urged the two sides to "show leadership and bring together Afghanistan", noting Western countries were engaging with the Taliban through international forums and that there were "lots of views" within it.
"If there is a government, and it is a government of both [existing groups and the Taliban] and we have committed to a diplomatic relationship, then that's exactly what it will be," he reiterated.
In an assessment likely to divide opinion, Wallace argued the Taliban "desperately" want international recognition in order to unlock financing and support for rebuilding the war-ravaged country.
"You don't do that with a terrorist balaclava on," he said.
"You have to be a partner for peace otherwise you risk isolation. Isolation led them to where they were last time.
"When you're one of the poorest nations on earth you need the help of the international community."
British Prime Minister Boris Johnson last week revealed he was "apprehensive" about Afghanistan's future.
Johnson said he hoped "the blood and treasure spent by this country over decades in protecting the people of Afghanistan has not been in vain and the legacy of their efforts is protected."
More than 400 British troops died in action in Afghanistan after the country joined the coalition intervention in 2001.