Karzai, who will be sworn in for a second term on Thursday, has been told by Western governments that he must crack down on corruption among members of the political class and the police.
Washington has been at the forefront of such international pressure, with Hillary Clinton, the US secretary of state, calling on Karzai to ensure his next government is free of corruption.
"We stand at a critical moment on the eve of the inauguration of President Karzai's second term," Clinton told about 150 US embassy staff in Kabul after arriving in the country for tomorrow's inauguration.
"There is now a clear window of opportunity for President Karzai and his government to make a compact with the people of Afghanistan."
Afghans losing faith in country's political process after disputed presidential election
She was also expected to meet with Afghan officials, US troops and international allies during her trip - her first to the country as secretary of state, the US state department said.
Afghans are facing the most deadly period of violence sine 2001, when US-led forces overthrew the Taliban regime, the report said.
More than 100,000 Nato and United States troops are in the country to fight against Taliban loyalists who have been resurgent in recent months.
"The past three decades of war and disorder have had a devastating impact on the Afghan people," the report said.
"Millions have been killed, millions more have been forced to flee their homes, and the country's infrastructure and forests have all but been destroyed.
"The social fabric of the country is fractured and state institutions are fragile and weak."
Many of those surveyed said that some warlords holding positions of power had spread insecurity and fuelled a lack of confidence in the government in Kabul.
"All officials and power-holders who are believed to have links to criminal networks must be subject to thorough and independent investigation, including those at the highest levels of government, and prosecuted accordingly," the report said.
Farooq Bashar, an Afghan political analyst, said that Karzai has to move quickly on political reforms.
"He has to pick up people who are obedient to the law, who are not corrupt, and who are not involved in human rights violations," he told Al Jazeera.
"We should look at him as a suspicious person, however, we do not need to disregard him. Right now, all of the Nato countries and the United States of America are saying that Karzai must work to remove corruption ... there is pressure from outside."
Mohammad Qasim Fahim, Karzai's choice for vice-president, is alleged by US-based Human Rights Watch and diplomats to have a role in abuses including murder during Afghanistan's 1990s civil war, weapons and drugs smuggling, and corruption.
US media have also accused Ahmad Wali Karzai, the Afghan president's brother, of having links to Afghanistan's drug trade, claims he has denied.
"Now the killers are in power. They are not thinking about what is best for the country and are only thinking about how they can benefit," one un-named Afghan man quoted in Oxfam's report said.
The report said that the international community must do more to counter corruption in Afghanistan, while ensuring that economic development continues.
"Many individuals felt that though much had been promised to the Afghan people, little had actually been delivered - creating frustration and disillusionment and ultimately undermining stability," it said.