Nearly a third of the population of Iraq is in need of immediate emergency aid, according to a new report from Oxfam and a coalition of Iraqi NGOs.
The report said the government was failing to provide basics such as food and shelter for eight million people.
It warned of a humanitarian crisis that had escalated since the 2003 invasion.
Meanwhile, the US agency overseeing reconstruction in Iraq said economic mismanagement and corruption were equivalent to "a second insurgency".
Special Inspector General for Iraqi Reconstruction Stuart Bowen was appointed by the US Congress to audit how billions of dollars of US money is being and has been spent.
In a BBC interview, he described corruption as "an enemy of democracy" and said that it could not be allowed to continue at current levels.
"We have performed 95 audits that have found instances of programmatic weakness and waste, and we've got 57 ongoing cases right now, criminal cases, looking at fraud."
Last year, Prime Minister Nouri Maliki's government only spent 22% of its budget on vital rebuilding projects, while spending 99% of the allocation for salaries, he said.
The inspector general also described a process of transferring control of projects to the Iraqi government as troubling, and found cancellations, delays and costs that outstripped budgets.
He said "a pathway towards potential prosperity" could be found only if oil production was brought up to optimal levels, and security and corruption effectively managed.
'Ruined by war'
The Iraqi parliament is about to take the whole of August off as a holiday despite the problems and the Oxfam report highlighting the plight of many Iraqis.
The BBC's Nicholas Witchell in Baghdad says the report by the UK-based charity and the NGO Co-ordination Committee in Iraq (NCCI) makes alarming reading.
The survey recognises that armed conflict is the greatest problem facing Iraqis, but finds a population "increasingly threatened by disease and malnutrition".
It suggests that 70% of Iraq's 26.5m population are without adequate water supplies, compared to 50% prior to the invasion. Only 20% have access to effective sanitation.
Nearly 30% of children are malnourished, a sharp increase on the situation four years ago. Some 15% of Iraqis regularly cannot afford to eat.
The report also said 92% of Iraq's children suffered from learning problems.
It found that more than two million people have been displaced inside the country, while a further two million have fled to neighbouring countries. Many are living in dire poverty.
"Basic services, ruined by years of war and sanctions, cannot meet the needs of the Iraqi people," the director of Oxfam International, Jeremy Hobbs, said.
Mr Hobbs said that despite the violence, the Iraqi government and the international community could do more to meet people's needs.
On Thursday, an international conference in Jordan pledged to help the refugees with their difficulties. Oxfam has not operated in Iraq since 2003 for security reasons.