Modernization is crucial to winning the hearts and minds of Muslims worldwide who are bombarded with negative images of the West, Rumsfeld told the Council on Foreign Relations.
The Pentagon chief said today's weapons of war include e-mail, BlackBerries, instant messaging, digital cameras and blogs.
"Our enemies have skillfully adapted to fighting wars in today's media age, but...our country has not adapted," Rumsfeld said.
"For the most part, the U.S. government still functions as a 'five and dime' store in an eBay world," Rumsfeld said, referring to old-fashioned U.S. retail stores and the online auction house respectively.
U.S. military public affairs officers must learn to anticipate news and respond faster, and good public affairs officers should be rewarded with promotions, he said.
The Pentagon's propaganda machine still operates mostly eight hours a day, five days a week while the challenges it faces occur 24 hours a day, seven days a week. Rumsfeld called that a "dangerous deficiency."
He lamented that vast media attention about U.S. abuses at Abu Ghraib prison in Iraq outweighed the notice given to the discovery of "Saddam Hussein's mass graves."
On the emergence of satellite television and other media not under Arab state control, he said, "Whileand extremist movements have utilized this forum for many years...we in the government have barely even begun to compete in reaching their audiences."
Rumsfeld also cited the methodical U.S. response to a Newsweek magazine report that interrogators at the U.S. military prison at Guantanamo Bay, Cuba, had placed the Koran, Islam's holy book, on toilets and flushed one down.
After riots around the world killed 16 people, Newsweek retracted the story.
"It was posted on Web sites, sent in e-mails, repeated on satellite television, radio stations for days, before the facts could be discovered," Rumsfeld said.