He said the appointment of former Intelligence Bureau chief Dineshwar Sharma to hold talks in Kashmir doesn't indicate a change of heart or approach by the Centre in its policy but that it will continue to hold on to its "muscular policy and military solution".
Mr Chidambaram said he was worried about what was happening in the valley as there was a deep ferment there.
"The appointment of the interlocutor should not lead us to think that there is a change of heart of the government. I don't believe that there is a change of heart or change of approach. I still believe that they will continue to hold on to the muscular policy and military solution," the Congress leader told The Wire news portal.
Mr Chidambaram said the appointment of Mr Sharma to open talks with all stakeholders in Jammu and Kashmir was a "diversionary move" to appease a section that was asking why the government was not holding talks in the troubled state.
He said Minister of State in the Prime Minister's Office Jitendra Singh had clarified that Mr Sharma was not an interlocutor and Army chief General Bipin Rawat had stressed that the move won't have any impact on military operations in Jammu and Kashmir.
"I think those two voices reflect the real view of the government," he said.
Speaking at an event in Mumbai, Mr Chidambaram said when people in Kashmir ask for "azadi" most of them want autonomy.
"Therefore, I think we should seriously examine the autonomy demand. It is very much within the Constitution. Jammu and Kashmir will remain an integral part of India with some amount of autonomy."
In his interview with The Wire, Mr Chidambaram said he was not convinced that Mr Sharma "has any mandate to hold meaningful talks with all sections of the society".
He said the government's Kashmir policy was "misguided" and that had deteriorated the situation in the state.
"The situation in Kashmir is worse than at any time before, and certainly worse than what it was in 2011. All the good work done between 2011 and say up to even the middle of 2015 after the NDA came to power... all that has been wiped out in the last two years," he said.