"Now, the situation is very delicate and dangerous. There are two possibilities, and we are ready for both - a big war or a peaceful resolution to the conflict," he told Al Jazeera’s Zeina Khodr from a secret location in Iraq's Qandil mountains.
About 40,000 people have died in the 25-year conflict between the Turkish authorities and the outlawed PKK, which is fighting for autonomy for Kurds living in southeast Turkey.
Solution 'near'
The PKK is closer than ever before to a negotiated solution with Ankara, Karalyan said.
"Turkey wasn't able to get rid of us militarily and they also tried politically and they failed. That is why a political solution is close," he said.
The PKK has bases ranged across Iraq's Qandil mountains, in an area where the Iraqi Kurdistan Regional Government (KRG) does not have a presence.
The group's attempts to win self-rule for Turkish Kurds has been frustrated by a lack of support from other nations in the region, who each fear that recognising their own Kurdish communities' claims for autonomy could provoke instability.
But in the Kurdish heartland in southeast Turkey, the Democratic Society Party (DTP), a party which the PKK supports, won in local elections last January.
"If they get rid of the PKK in northern Iraq, it doesn't mean we are finished because we are inside Turkey and we are strong," Karalyan said.
Turkish 'plan'
The United States and Turkey have both designated the PKK as a terrorist organisation, and Ankara has tried to use the Iraqi Kurdish political parties to help them crush their opponents.
"Turkey's new policy is to involve the Kurdistan Regional Government," Karalyan said.
"They used to have a red line not to deal with the regional administration in northern Iraq. Now they are in direct contact with them.
"The Turkish government wants the KRG to fight us. I do not expect the KRG to use force, but they have been taking measures against us restricting our movements. The Turks want them to do more than that."
But Massoud Barzani, the president of the KRG, said that although Turkey wants his administration to move militarily against the PKK it will not do so.
"We are ready and we will not accept our land to be used to help any party to threaten and destabilise our region. We will not be part of anything to solve it militarily," he said.
"The PKK is an internal Turkish problem. We are ready to be part of trying to find a peaceful solution. Not more than that. No pressure and no military solution."
The Iraqi government, led by Nuri al-Maliki, in 2007 signed a memorandum of understanding with Ankara pledging to rid Mount Qandil of PKK fighters, but Baghdad has failed to dislodge them.