The report, Trends in Global Terrorism:Implications for the United States, which represents the views of at least 16 spy agencies within the US government, said: "The Iraq war has made the overall terrorism problem worse" the New York Times reported.
The Washington Post said the report, completed in April this year, described the Iraq conflict as the primary recruiting vehicle for violent Islamic extremists.
Edward Kennedy, a US senator, said in a statement: "This intelligence document should put the final nail in the coffin for president Bush's phony argument about the Iraq war."
Rahm Emanuel, congressman and head of the Democratic effort to take control of the house, said: "Unforunately this report is just confirmation that the Bush administration's stay-the-course approach to the Iraq war has not just made the war more difficult and more deadly for our troops, but has also made the war on terror more dangerous for every American.
"It's time for a new direction for this country."
US opinion polls indicate that the president's party could possibly lose control of both houses of congress in the mid-term elections in November, largely over unhappiness about the war in Iraq.
The report comes after Bush has repeatedly argued in pre-election speeches that Iraq is the central front in the so-called war on terrorism, and that demands by democrats for US troop withdrawal underscored why the US opposition should not be trusted with US security.
In a speech on August 31, George Bush said: "The security of the civilised world depends on the victory in the war on terror, and that depends on victory in Iraq."
The president did not mention Afghanistan or the fight against the Taliban within the same sentiment, putting the focus mainly on Iraq.
The White House would not comment on the classified report, but said New York Times' story on Sunday "isn't representative of the report".
A White House spokesman said: "We've always said that the terrorists are determined. Keeping the pressure on and staying on the offense is the best way to win the war on terror."