The report found that the Iraq's US-backed government had failed to achieve goals considered necessary to bring sectarian violence under control, such as passing legislation to divide the nation's oil revenues.
Despite the bleak report, Bush said he had "confidence" in Nuri al-Maliki, the Iraqi prime minister.
"Yeah, I've got confidence in him, but I also understand how difficult it is. I'm not making the excuses, but it is hard," said Bush.
"I don't think Congress ought to be running the war"
The report said that the security situation in Iraq remains "complex and extremely challenging", and that the level of violence seen in Iraq had "undermined efforts to achieve political reconciliation".
"Amid such violence, it became significantly harder for Iraqi leaders to make the difficult compromises necessary to foster reconciliation," said the report.
Bush highlighted the benchmarks that had been satisfactorily achieved, including Iraqi government's co-operation in letting Iraqi forces combat anti-US fighters and money spent to train and equip its forces.
But Hoda Abdel Hamid, Al Jazeera's Iraq correspondent, said: "I've spoken to military people on the ground, whether they are Iraqi or American ... The co-operation is not always as great as you might think."
"A lot of recruits do not show up for work, the Iraqis are more reluctant to go into neighbourhoods because of sectarian reasons and other times because they just don't have the equipment ... Sometimes they don't have bulletproof vests, they don't have bulletproof cars and sometimes they don't really have bullets."
Rob Reynolds, reporting for Al Jazeera, said: "The bottom line is the president is trying to put the very best face on a very poor report card."
The report came as several prominent Republicans broke ranks with Bush on Iraq.
|Bush signalled he would veto any legislation |
requiring a "hasty" withdrawal from Iraq [EPA]
Asked about waning Republican support, Bush said he took what was said into account. "I value the advice of those senators, I appreciate their concerns... and I will continue listening to them."
But he said he would also waiting to hear from General David Petraeus, the top US commander in Iraq, in September.
"I'm waiting for ... David Petraeus to come back and give us the report on what he sees," said Bush.
Some analysts suggested Bush was trying to shift blame on to the military.
Meanwhile, Democratic leaders have said they expect to soon pass a bill requiring the withdrawal of US combat troops from Iraq by April 1, 2008.
But in his press conference, Bush signalled that he would veto any legislation requiring what he described as a hasty withdrawal of US troops from Iraq.
"I don't think congress ought to be running the war," said Bush.
"The idea of [congress] telling our military how to conduct operations, for example, or how to deal with troop strength, I don't think it makes sense today, nor do I think it's a good precedent for the future."
A USA Today/Gallup poll this week showed more than seven in 10 Americans favour withdrawing nearly all US troops by April.
Bush also blamed Iran and Hezbollah for training armed groups in Iraq ranged against US-led forces.