"Sectarianism in its units undermines its ability to provide security; the [police] force is not viable in its current form."
The report says the force should be disbanded and reorganised.
The assessment is one of several ordered by the US congress this month.
The commission report says Iraqi security forces "have the potential to help reduce sectarian violence".
Speaking about the Iraqi army, the authors say it is now able to assume more combat duties from US-led forces, but would not be able to operate independently within the next 12 to 18 months.
The Washington Post daily reported on Wednesday that the document emphasises the failure of Nuri al-Maliki's government to achieve key political benchmarks, and says that violence will not end without political reconciliation.
It says that al-Maliki is perceived as bypassing the defence ministry and the chain of command to create "a second, and politically motivated" command structure in the army.
Anbar improvement
The report acknowledges that the security situation has improved dramatically in Anbar province and sees "signs of encouraging tactical successes in the Baghdad capital region".
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"Had the US foreign policy makers read history, they would not get involved in any war after Vietnam"
Mishmish, Egypt
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It says those "circumstances of the moment" may provide an opportunity for beginning to transition US forces to a "strategic overwatch posture" in early 2008, re-tasking them to concentrate on border defence and infrastructure defence.
The massive US "footprint" conveys the image of "an occupying force" when "what is needed is the opposite impression", the document says.
It proposes significant consolidation and reduction of US installations and the establishment of a US-Iraqi Transition Headquarters.
A separate account by a congressional investigative agency on Tuesday said that violence remained high in Iraq.
It concluded that the fewer Iraqi security services were capable of conducting operations independent of multi-national forces.