The report's chief author, Nadir Farghani, confirmed on Tuesday that the document would not be an official United Nations Development Programme (UNDP) report, as had been the case in previous years.
He said Washington had specifically objected to criticism of the US-led occupation in Iraq and Israel's policies in the Palestinian territories.
"They threatened to considerably reduce their financial contribution to the United Nations' development budget" if it officially sponsored the report, Farghani alleged.
"The report ... will be published with the sole endorsement of its authors and not that of the UN, after the United States and Egypt voiced reservations over its contents," he said. The report will be published in January 2005.
Cairo also expressed displeasure over certain aspects of the report, including references to the "inheritance of power in Egypt", a thinly veiled allusion to the alleged grooming of President Husni Mubarak's son, Jamal.
Farghani said Cairo had also objected to the assessment of freedoms in Egypt and demands for improved freedom to establish political parties.
Sources who read the draft report hinted that Cairo may have understood its demands for greater political freedom as a request to legalise groups such as the Muslim Brotherhood, a banned Islamist movement that is the country's main opposition group.
UN officials had said earlier this month the report was being reviewed after criticism poured in but had remained adamant it would be published by the UNDP, as planned.
Arab League comment
The draft "includes serious elements and others that need correcting," Arab League Secretary-General Amr Musa said on Tuesday.
"There are problems preventing its release by the UNDP. We expect it to be issued by a third party," said Musa, a former Egyptian foreign minister.
US President George Bush relied on elements included in the 2002 edition of the report to push his agenda for reforms in the region and his so-called Greater Middle East Initiative.
The report will be the third commissioned by the UNDP on development in the Arab world. The first two caused a stir in the region by painting a bleak picture of progress in Arab countries.