The report said that despite progress on some fronts by the government of Nouri al-Maliki, "the security situation in Iraq remains complex and extremely challenging," the "economic picture is uneven" and political reconciliation is lagging.
In an assessment required by Congress, the administration also accused Syria of fostering a network that supplies as many as 50 to 80 suicide bombers per month for al-Qaeda in Iraq. It also said Iran continues to fund extremist groups.
"The bottom line is this is a preliminary report and it comes less than a month after the final reinforcements arrived in Iraq," President Bush said at a news conference Thursday.
Bush was still answering questions when Senate Majority Leader Harry Reid, D-Nev., responded. "It is time for the president to listen to the American people and do what is necessary to protect this nation. That means admitting his Iraq policy has failed, working with the Democrats and Republicans in Congress on crafting a new way forward in Iraq, and refocusing our collective efforts on defeating al-Qaeda," he said in a statement.
"The report is not a snapshot of what is happening in Iraq today, but a sad reality of what has been occurring in that country for the past few years," House Speaker Nancy Pelosi of California said in a statement.
Among the key goals, Iraq's government has not completed a review of its constitution or passed a law to divide oil revenues. It also has not passed laws on amnesty for former members of the Baath Party, which ruled under Saddam Hussein.
The report was issued in the fifth year of a war that has taken the lives of more than 3,000 U.S. troops, and is costing the United States an estimated $10 billion a month.
In all, it credited the Iraqi government with satisfactory progress on eight benchmarks, unsatisfactory progress on another eight and mixed results on the other two.
Before Thursday's report, some analysts said it is hard to give a "yes" or "no" answer on the progress of many of the benchmarks because the Iraqi government is still pursuing them.
Ilan Goldenberg, an Iraq war critic and policy director of the National Security Network, an organization of security experts, said the 18 goals can be boiled down to three questions: Has Iraq security improved? Are more Iraqi security forces taking the lead? Is the security operation promoting political stability?
"The answer is no on all three," he said.
Anthony Cordesman, a security expert at the Center for Strategic and International Studies, said, "We're talking about issues that can't be handled quickly."
The report warned of "tough fighting" during the summer, as U.S. and Iraqi forces "seek to seize the initiative from early gains and shape conditions of longer-term stabilization."
While Bush announced last winter he was ordering thousands of additional troops to the war zone, the full complement has only arrived in recent weeks. "The full surge in this respect has only just begun," the report said.
At the White House, press secretary Tony Snow said the fact that "satisfactory progress" has been made in several security areas "should provide some space for the government of Iraq to make progress on key political benchmarks."
"The report is balanced and sober," he said in a statement. "It documents the challenges faced by U.S. and Iraqi forces and provides a basis for measuring progress as the surge enters the stage of full implementation."
The report was designed as an interim assessment of the shift in policy that Bush announced last winter, in the wake of Republican defections in an election in which the war played a significant role.
A second report is due in September from Gen. David Petraeus, the commander of U.S. forces in Iraq.
The new assessment landed as both houses of Congress debated legislation to order the withdrawal of U.S. troops by next spring. The House appeared on track to approve its version of the bill later in the day, but opponents in the Senate appear to have the strength to prevent a final vote next week in the Senate.
In either event, Bush has pledged to veto the legislation, and has enough support to make his rejection stick.
Still, with polls showing scant public support for the war, and the U.S. casualty count climbing, Republicans whose names will be on the 2008 election ballot have shown increasing signs of restiveness in recent weeks.
Several veteran Republicans have called on Bush to change course, and Sen. Gordon Smith, R-Oregon, on Wednesday became the first member of his party to announce on the Senate floor that he will support legislation that orders a troop withdrawal to begin within 120 days, to be completed by next April 30.
That announcement, along with other calls for a dramatic change in policy, prompted an acerbic response from Rep. John Boehner, R-Ohio. "Wimps," he called fellow GOP lawmakers who part company with the president on the war.
Bush in recent days rejected calls for any shift in strategy before September. But neither he nor administration officials have speculated about what might happen after that.
The administration's report, however, referred repeatedly to the Iraq Study Group that issued a report last winter that drew widespread praise in Congress.
The bipartisan panel said Bush should start handing off the combat mission to the Iraqi forces and pave the way for a drawdown of U.S. forces in 2008.
"While all of those conditions have not yet been met, and the new strategy is still in its early stages, there are some encouraging signs that should, over time, point the way to a more normalized and sustainable level of U.S. engagement in Iraq, with a decreasing number of U.S. combat forces increasingly focused on a core set of missions, such as those set out by the bipartisan Iraq Study Group," the report states.
Contributing: David Jackson in Washington; the Associated Press; Randy Lilleston in McLean, Va.