His statement directly contradicted assertions by President George Bush and top Pentagon officials that the US military has what it needs.
"We never had enough troops on the ground," Ambassador Paul Bremer told a conference of insurance professionals in White Sulphur Springs, West Virginia, on Monday.
He said the lack of adequate patrolling after the fall of Baghdad and other parts of the country to US troops had resulted in what he called "horrid" looting.
"We paid a big price for not stopping it because it established an atmosphere of lawlessness," he said.
The remarks drew a stark contrast with repeated upbeat statements by Bush, Defence Secretary Donald Rumsfeld and other top administration officials, who have insisted the US has enough forces in Iraq.
About 133,000 US troops are currently deployed in Iraq after toppling the government of Saddam Hussein in 2003, saying it had illegal stockpiles of weapons of mass destruction, top defence officials say.
Other countries have a total of 23,500 troops in the country.
None of the alleged WMD stockpiles have been found.
Possibility of WMDs
But Bremer said he agreed with Bush's decision to use force in Iraq because there was a "real possibility" Saddam Hussein might provide weapons of mass destruction to "terrorist" groups that had vowed to kill hundreds of thousands of Americans.
About 133,000 US troops are
stationed in Iraq
"The status quo was simply untenable," he said. "I am more than ever convinced that regime change was the right thing to do."
He dismissed charges often voiced by Bush critics that the administration had no plans for post-war Iraq, but acknowledged that many of these plans were inadequate.
"There was planning, but planning for a situation that didn't arise," he said, including a large-scale humanitarian or refugee crisis or the possibility that Saddam might blow up Iraq's oil fields and refineries.
"Could it have been done better?" the former Iraq administrator went on to ask. "Frankly, I didn't spend a lot of time looking back."
He argued the Iraqi economy was on the rebound and he anticipated a considerable flow of foreign capital into the country once the security situation improved.
In addition he has expressed confidence Iraq's first democratic elections scheduled for late January will take place despite violence raging across the country.
"I believe the elections will happen," Bremer said. "They will be rough; there will be violence, but that is not unusual for initial elections in war-torn areas."
He added that he was overall "optimistic" about the future of Iraq.