Condoleezza Rice, the secretary of state, launching the report in Washington, said that religious freedom is "integral to our efforts to combat the ideology of hatred and religious intolerance that fuels global terrorism".
The report says that amid intra-sectarian violence, conditions for worship have "deteriorated" in Iraq, with the ongoing civil war "significantly" harming the ability of people to practise their faith.
"Many individuals from various religious groups were targeted because of their religious identity or their secular leanings," it said.
John Hanford, the US special envoy for international religious freedom, said: "What we're dealing with in Iraq is really a security situation that makes it difficult for religious practice to occur in a normal way."
He also said that Iraq's constitution guarantees religious freedom but it was hampered by sectarian violence and that worshippers were getting caught in the "crossfire" of broader attacks.
Outside of Iraq, the report also noted problems with religious freedom in a number of other Muslim-majority countries.
In Egypt respect for religious freedom is said to have "declined".
Hanford said: "There are cases where converts have been held and sometimes received physical abuse."
In Pakistan, the report said "serious problems remained" despite some steps by the government to improve the treatment of religious minorities.
It pointed to "discriminatory" legislation and Islamabad's "failure" to take action against societal forces hostile to minority faiths.
The report said that religious freedom in Saudi Arabia remained "severely restricted", but added that "there were positive developments which could lead to important improvements in the future".
The US report also highlighted religious repression in China.
The country reportedly expelled more than 100 foreign missionaries in the spring of 2007 in what some groups alleged was a "government-initiated" campaign to tighten control of churches before the 2008 Olympic Games.
There were also "credible reports of deaths due to torture and abuse" involving practitioners of the Falun Gong sect who "continued to face arrest, detention and imprisonment".
Beijing is imposing "extremely harsh treatment" on those determined to have religious contact in China, Hanford said.
The Report on International Religious Freedom, sent to Congress Friday, is a precursor to the announcement each year of a blacklist of countries "of particular concern" that are subject to US sanctions for religious repression.
Iran headed last year's list alongside China, Eritrea, Myanmar, North Korea, Saudi Arabia, Sudan and Uzbekistan.
The list will be updated based on the findings of the state department report released on Friday.