The Soviets used to kill all the family members of terrorists who committed acts against them. Blow up some Russians and your whole family dies. Your hometown is seiged. Walk softly, carry a big stick sort of thing. Terrorist attacks should not go unaddressed. The retailiation against a terrorist attack should set an example that future attacks are not tolerated and will be met with an overwhelming response.
Fighting terrorism with terrorism? Maybe effective, but what about the fact that you're confronted with the choice between (1) being able to claim no moral high ground or (2) spending a lot of money on misleading propaganda in order to be able to claim moral high ground?