The report, prepared by the office of the inspector general of Iraq's oil ministry, said the only solution is a crackdown by Iraq's government.

"The corruption in the oil sector and smuggling of oil products to neighbouring countries are the most important reasons behind the loss of billions of dollars, and these two problems are the biggest threat to Iraq's economy," the report said.

Corruption and smuggling, combined with frequent attacks on oil pipelines in the north by insurgents, have prevented Iraq from rebuilding its battered oil infrastructure, said the report, released by Assem Jihad, the spokesman for the inspector general's office.

"For example, about 20 percent of the oil products that Iraq imported last year, worth US$4.2 billion, were smuggled to neighbouring countries," the report said.

"Crude oil produced in Iraq also was stolen from its pipelines."

Action urged

The report urged Iraq's parliament and Jawad al-Maliki, the prime minister-designate, to crack down on the corruption and smuggling, and to better protect oil plants and pipelines from attacks by insurgents.

Al-Maliki is trying to form a cabinet from Iraq's complex mix of Shias, Kurds and Arab Sunnis, and one of the more important portfolios will be oil minister.

Oil production has stagnated, averaging 2.05 million barrels a day in mid-March, short of the 2.5 million-a-day US goal and far short of Iraq's production peak of 3.7 million in the 1970s.

Fewer than one-quarter of the American-funded rehabilitation projects for the oil industry have been completed.

Iraq's proven oil reserves, estimated at 110 billion barrels, are the world's third largest after Saudi Arabia and Canada.

But Iraq's oil production is so poor that the country is forced to import oil.