The US also knows "disturbingly little" about the weapons programmes and threats posed by many of the nation's most dangerous adversaries, the commission said on Thursday.
The commission called for dramatic change to prevent future failures.
It outlined more than 70 recommendations, saying that President George Bush must give John Negroponte, the new director of national intelligence, broader powers for overseeing the nation's 15 spy agencies.
It also called for sweeping changes at the FBI to combine the bureau's counter-terrorism and counter-intelligence resources into a new office.
The unclassified version of the report does not go into significant detail on the intelligence community's abilities in Iran and North Korea because commissioners did not want to tip Washington's hand to its leading adversaries.
The commission favours broader
powers for John Negroponte
Those details are included in the classified version.
The commission was formed by Bush a year ago to look at why US spy agencies mistakenly concluded that Iraq had stockpiles of weapons of mass destruction, one of the administration's main justifications for invading in March 2003.
"We conclude that the intelligence community was dead wrong in almost all of its pre-war judgments about Iraq's weapons of mass destruction," the commission said in a report to the president. "This was a major intelligence failure."
The main cause, the commission said, was the intelligence community's "inability to collect good information about Iraq's WMD programmes, serious errors in analysing what information it could gather and a failure to make clear just how much of its analysis was based on assumptions rather than good evidence.
The report added: "On a matter of this importance, we simply cannot afford failures of this magnitude."
But the commission also said that it found no indication that spy agencies distorted the evidence they had concerning Iraq's alleged weapons of mass destruction, a charge raised against the administration during last year's presidential campaign.
"The bad news is that we still know disturbingly little about the weapons programmes and even less about the intentions of many of our most dangerous adversaries"
Overall, the report delivered a harsh verdict. "Our intelligence community has not been agile and innovative enough to provide the information that the nation needs," the commission said.
It noted that other investigations have reached similar conclusions. "We should not wait for another commission or another administration to force widespread change in the intelligence community," the report said.
Looking beyond Iraq, the panel examined the ability of the intelligence community to accurately assess the risk posed by America's foes.
"The bad news is that we still know disturbingly little about the weapons programmes and even less about the intentions of many of our most dangerous adversaries," its report said.
The commission did not name any country but appeared to be talking about nations such as North Korea and Iran.