Colin Powell, the former US secretary of state, is quoted as saying that the Pentagon gave inflated figures on the number of Iraqi security forces on the ground.
The defence department "kept inventing numbers of Iraqi security forces - the number would jump 20,000 a week! We now have 80,000, we now have 100,000, we now have 120,000", he is quoted as saying.
The report says that Powell's view was supported by Lieutenant-General Ricardo Sanchez, the most senior ground troops officer in Iraq, and Paul Bremer, the civilian administrator before the Iraqi government takeover in June 2004.
It concluded that the US government did not have the policies nor the organisational structure required to put the largest reconstruction programme since the Marshall Plan into place, the newspaper reported.
The work did not go beyond restoring what was destroyed during the invasion and its immediate aftermath, it said.
By mid-2008 $117bn had been spent on the reconstruction of Iraq, including about $50bn in US taxpayer money, according to the report.
Ahmed Rushdi, an Iraqi journalist, told Al Jazeera the money had been squandered or taken by corrupt officials.
"When you are talking about $117 billion, you are talking about stolen money, misused money, and poor planning. But the Americans and the Iraqis said that these monies were being spent on security," he said.
"I think Americans and some Iraqis have got very rich [off the funds] and they decided to get rid of all their documents which would show that something was wrong, particularly in Paul Bremer's administration."
|Iraq's reconstruction has foundered amid the tense security situation in the country [AFP]
"We must make a rule on how to charge these people with crimes."
In one example, an official at the US Agency for International Development (USAID) was given four hours to work out how many miles of Iraqi roads needed to be repaired, the Times said.
The official's estimate came from documents in USAID's library and was then submitted into a master plan.
Furthermore, funding for a large amount of Iraqi reconstruction projects was divided up among local politicians and tribal leaders, the New York Times reported.
"Our district council chairman has become the Tony Soprano of Rasheed, in terms of controlling resources," it quotes one US embassy official in Baghdad as saying.
"You will use my contractor or the work will not get done.'"
The report also pointed to political manoeuvring in the US, highlighting an example where a Republican lobbyist working for the US occupation authority called on the Office of Management and Budget to fund $20bn in new reconstruction money in August 2003.
"To delay getting our funds would be a political disaster for the president [George Bush]," Tom Korologos, the lobbyist, said, according the report.
"[Bush's] election will hang for a large part on show of progress in Iraq and without the funding this year, progress will grind to a halt," the draft quoted Korologos as saying.
The Bush administration supported Korologos' request and the US congress allocated the money later that year.
The report was based on about 500 interviews and more than 600 audits, inspections and investigations undertaken in Iraq over several years.
News of it comes amid continued scrutiny over the role of the US military in Iraq and the timetable for its withdrawal from the country.