A surge in Iraqi sectarian violence and insurgent attacks — fueled by Syria and Iran — has combined to make the security situation in the country the most complex since the U.S.-led invasion more than three years ago, according to a Pentagon report released Friday.

The report warned that conditions exist that could lead to civil war, and that there is an increasing concern about that among the Iraqi people.

"Death squads and terrorists are locked in mutually reinforcing cycles of sectarian strife," the report said, adding that the Sunni-led insurgency "remains potent and viable" even as it is overshadowed by the sect-on-sect killing.

"Conditions that could lead to civil war exist in Iraq, specifically in and around Baghdad, and concern about civil war within the Iraqi civilian population has increased in recent months," the report said.

"The security situation is currently at its most complex state since the initiation of Operation Iraqi Freedom," the report said, using the U.S. military's name for the war that was launched in March 2003 to topple Saddam Hussein.

The report pointed to interference from neighboring Iran and Syria, accusing the two nations of driving a "vocal minority" of religious extremists who oppose the idea of a democratic Iraq.

The report, issued quarterly and mandated by Congress, is the first since the Iraqi government of Prime Minister Nouri al-Malaki assembled its full slate of ministers in early June.

Peter Rodman, the assistant secretary of defense for international security affairs, told reporters that although there has been progress this summer in reviving the Iraqi economy and raising electricity production, the security conditions have deteriorated even as the number of trained Iraqi troops has increased.

"The last quarter, as you know, has been rough," Rodman said. "The levels of violence are up and the sectarian quality of the violence is particularly acute and disturbing."

That assessment, which has been expressed publicly by U.S. military commanders and others in recent weeks, was tempered by a degree of optimism that the Iraqi government — with support from U.S. troops — will succeed in quelling the sectarian strife.

Optimism among ordinary Iraqis, however, has declined, the 63-page report said.

When asked whether they believe "things will be better" in the future, the percentage of Iraqis responding positively has dropped fairly consistently over the past year — whether they were asked to look ahead six months, one year or five years — according to polling data cited in the report.

Although it acknowledged the risk of civil war, the report said the current violence does not amount to civil war and asserted momentum toward a civil war can be stopped.

"Breaking the cycle of violence is the most pressing goal of coalition and Iraqi operations," it said.