US forces have achieved "significant progress" in Iraq over the last three months but the handover to Iraqis is lagging, the Pentagon has said.
Iraq is becoming safer and the economy is growing at more than 6%, according to a new quarterly report for Congress.
But it said that although Iraqi forces have grown in size, they still depend on the US for logistics and training.
The report also warned that Iranian training and funding of Shia militias in Iraq has continued.
The Pentagon echoed its last report on Iraq in September.
The latest document said there had been "significant security progress, momentum in reconciliation at the local and provincial levels and economic progress".
High-profile attacks had dropped by half since March, the report said
It cited a "tribal awakening" of local Sunni and Shia leaders turning against al-Qaeda.
It also noted that more Iraqi battalions were conducting operations and taking a lead in counter-insurgency efforts.
But the Pentagon warned that sustained progress would depend on political and economic reforms, and listed a number of problems.
Among these was the fact that key legislation to govern oil revenues and Sunni representation in government has still not been passed.
Police forces are afflicted by corruption and sectarian divisions, while Iraq's army is losing up to 17% of its troops a year because of high casualty rates and desertion, the report said.
Meanwhile, the Pentagon said Iranian support for militants in Iraq had not decreased, and that Syria was not doing enough to keep foreign fighters out of Iraq.
Tehran denies any links with militants groups in Iraq.