The funds are separate from the $53 billion allocated by Congress for rebuilding Iraq.

No basic services

The report comes at a critical time for Iraq, where people complain basic services like electricity and clean water are sharply lacking seven years after the US-led invasion that toppled Saddam Hussein.

The audit cited a number of factors that contributed to the inability to account for most of the money withdrawn by the Pentagon from the Development Fund for Iraq.

It said most of the Defence Department organisations that received DFI money failed to set up Treasury Department accounts as required.

In addition, it said no Defence Department organisation was designated as the main body to oversee how the funds were accounted for or spent.

"The breakdown in controls left the funds vulnerable to inappropriate uses and undetected loss," the report said.

Money on hold

The audit found that the US continues to hold about $34.3 million of the money even though it was required to return it to the Iraqi government.

The audit did not indicate that investigators believed there were any instances of fraud involved in the spending of these funds.

The DFI includes revenues from Iraq's oil and gas exports, as well as frozen Iraqi assets and surplus funds from the now-defunct, Saddam Hussein-era oil-for-food programme.

With the establishment of the Coalition Provisional Authority, which ran Iraq shortly after the start of the US invasion in 2003 until mid-2004, about $20 billion was placed into the account.