"U.S. military forces, especially our ground forces, have been stretched nearly to the breaking point by the repeated deployments in Iraq, with attendant casualties ... greater difficulty in recruiting and accelerated wear on equipment," the report said.
The panel found that the traditional partnership between uniformed services and civilian leaders "has frayed, and civil-military relations need to be repaired."
The report faulted U.S. practices for "underreporting" violence in Iraq, saying American officials leave out many deaths that may be the result of war or insurgent action.
"The standard for recording attacks acts as a filter to keep events out of reports and databases," the report said. "A murder of an Iraqi is not necessarily counted as an attack."
The effect is such that on one day in July, U.S. officials recorded 93 attacks or significant acts of violence. But the commission members said a review of reports uncovered 1,100 acts of violence.
For all that, the future could be far worse, the report said.
"We do not recommend a 'stay the course' solution," Baker said at a morning news conference. "In our opinion, that approach is no longer viable."
Asked if the group accepted Bush's earlier goal of making Iraq a model for democracy in the Middle East, panel members said they preferred to focus on the more recently stated goals: making the country stable, self-governing and secure.
The report rejected the idea of an immediate troop withdrawal, saying that would probably intensify violence and create a dangerous power vacuum. It said that a large increase in U.S. troops would not solve the essential problem: the need for a political deal between Iraqi factions.
The panel ruled out proposals calling for sharply decentralizing the country into three sections, arguing that the mix of ethnic and religious populations would make separating them difficult and dangerous.
At the heart of the Iraq Study Group's proposal is its recommendation for a "new diplomatic offensive" that it said U.S. officials should launch by the end of the year. Panel members recommended formation of a standing group of countries and organizations -- much as world powers formed a "contact group" to deal with Afghanistan after U.S. troops toppled the Taliban in late 2001.
The new group would consist of Iraq's neighbors, key regional allies such as Egypt, the Persian Gulf states, the five permanent members of the U.N. Security Council, and the European Union.
The panel argued that a regional solution was needed because all of the Mideast's problem are so closely linked. As an example, it said that resistance to the U.S. presence -- as well as support for militant Shiite cleric Muqtada Sadr -- had "spiked" in the aftermath of the Israeli bombing campaign in Lebanon this summer.
The group said the diplomatic offensive should include, as soon as possible, unconditional meetings between Israel, Lebanon and Syria on one hand, and between Israel and the Palestinians on the other -- provided the Palestinians represented acknowledge Israel's right to exist.
Baker staunchly defended the need for U.S. officials to deal with Syria and Iran, even though administration officials believe that would be rewarding bad behavior by ignoring Iran's ambitions to develop a nuclear program.
"For 40 years we talked to the Soviet Union during a time when they were committed to wiping us off the face of the Earth," Baker said. "We're talking not about talking to be talking; we're talking about tough diplomacy."
The group also urged that the United States, in the interest of reducing Iraqi opposition, declare publicly that it has no desire to establish permanent military bases and has no designs on Iraqi oil. However, the group said the U.S. government should consider requests from the Iraqis to maintain temporary bases.
The idea of withdrawing all combat brigades by 2008 was not among the 79 recommendations. But the report's narrative said that, "subject to unexpected developments," almost all combat units could be pulled out by then.
The report said that an open-ended commitment provided no incentive for the Iraqi government to move toward reconciliation.
"While it is clear that the presence of U.S. troops in Iraq is moderating the violence, there is little evidence that the long-term deployment of U.S. troops by itself has or will lead to fundamental improvements in the security situation," it said.
The report represents "a big change" in the national debate over the Iraq war, said former Pentagon official John Hamre, president of the Center for Strategic and International Studies, a Washington think tank.
"It changes the goal from victory to stability with disengagement," Hamre said.
In Baghdad, Iraqis watching news reports on Arabic-language television greeted the findings with a mix of skepticism and guarded hope.