The measure says only a limited residual force would remain to train Iraqi troops, protect US assets and fight al-Qaeda and other groups.
Earlier George Bush, who has ruled out any immediate shift in policy, sought to defend his troop "surge" strategy in Iraq, saying he would wait until a fuller report is delivered by the head of US forces there in September.
"I don't think congress ought to be running the war"
"I believe we can succeed in Iraq, and I know we must,"' Bush said at a White House news conference at which he stressed the interim nature of the report.
The much-anticipated assessment released on Thursday said that the security situation in Iraq remained "complex and extremely challenging", and that the level of violence 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," it added.
The interim assessment said only eight of the 18 US benchmarks in Iraq have been achieved satisfactorily.
|The interim report gave a bleak assessment |
of progress in Iraq [EPA]
It said progress on eight other benchmarks, intended to grade Iraqi political and security developments, had been unsatisfactory, while progress on two others had been mixed.
The report found that the 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.
But despite the bleak tone, Bush said he continued to have 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.
Bush highlighted the benchmarks that had been satisfactorily achieved, including the 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 Baghdad correspondent, said military people on the ground – both American and Iraqis – have told her that co-operation is well below levels Bush might expect.
She said: "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."
The report came as several prominent Republicans broke ranks with Bush on Iraq, saying the so-called troop "surge" was not working and it was time to rethink US policy.
|Bush signalled he would veto any legislation |
requiring a "hasty" withdrawal [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 most senior US commander in Iraq, in September.
Some analysts have suggested Bush is trying to shift blame for failure of the so-called "surge" on to the military.
Speaking before the vote on withdrawing troops in the House of Representatives, Bush signalled that he would veto any legislation requiring what he described as a hasty pull-out from Iraq.
"I don't think Congress ought to be running the war," he said.
"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.