"It is a serious situation," Tony Blair told a news conference in his Downing Street home on Thursday.
"This is the British and American forces and the vast majority of Iraqis versus a small number of Saddam's supporters and an increasing number of outside terrorist groups."
His comments come after Defence Secretary, Geoff Hoon, ordered a review of troop levels in Iraq, as concerns grow that British forces in the south of the country are becoming overstretched.
Britain currently has 11,000 troops in Iraq.
Fifty have died there, 17 in the last four months, as security conditions continue to deteriorate.
But Blair said no decisions had been made to commit more forces.
"We keep it constantly under review because we have got to get the job done. But there are no decisions that have been taken on additional troops," he said.
Hoon's review followed reports about Foreign Secretary Jack Straw urging Blair to send more troops to Iraq or risk "strategic failure".
In notes prepared for a meeting, Straw warned Blair that the current military force was incapable of providing the level of reconstruction needed.
Jack Straw wants more British
troops in Iraq
Straw said sending an extra 5000 troops would not only help improve security, but also demonstrate Britain's resolve to sceptical Iraqis and other occupation forces.
Straw warned the "lack of political progress in solving the linked problems of security, infrastructure and the political process are undermining the consent of the Iraqi people to the coalition presence".
He also said the current problems were providing "fertile ground for extremists and terrorists".
Conceding a need for international help, the administration of US President George Bush began a campaign on Wednesday to involve the United Nations more deeply in Iraq.
Daily guerrilla attacks on US-led troops and recent bombings that have killed hundreds have fuelled security worries.
But Blair could face strong resistance to the idea.
The Blair government's public trust rating has plunged over the failure to find weapons of mass destruction in Iraq - the main reason the prime minister gave to justify war – as well as an inquiry into the death of a British arms expert caught up in the row.