The United States should begin to withdraw forces from combat and launch a diplomatic push, including Iran and Syria, to prevent "a slide toward chaos" in Iraq, an elite panel recommended on Wednesday.

The Iraq Study Group also urged Washington to reduce its political, military or economic support if Iraq's government fails to advance security and reconciliation in the country, where, after almost four years of war, sectarian violence kills scores of people every day.

The influential, bipartisan group offered a pessimistic assessment of circumstances in Iraq and painted a nightmare scenario of rampant violence and spreading unrest across the region if the United States fails to stabilize the country.

Among its unanimous recommendations, the group called for the White House to overcome its resistance to dealing directly with Iran and Syria, whom U.S. officials accuse of fomenting the Iraqi insurgency, and to press for a "comprehensive Arab-Israeli peace" to settle that festering conflict.

President Bush said he would take the much-anticipated report "very seriously" after he met the group but the White House has made clear he will not be bound by its ideas and has begun its own review of Iraq policy.

"The situation in Iraq is grave and deteriorating," the five Republicans and five Democrats in the group said of the war, in which more than 2,900 U.S. troops have died. "There is no magic formula to solve the problems."

The group called for the diplomatic push to begin by the end of the year and recommended the U.S. military strengthen its effort to train Iraqi forces by increasing the number of U.S. forces engaged in such work to 20,000 from about 4,000.

"The primary mission of U.S. forces in Iraq should evolve to one of supporting the Iraqi army, which would take over primary responsibility for combat operations," it added.

While it set no hard timetable for the transition, the report said that by the first quarter of 2008 U.S. combat troops not needed for "force protection" could be out of Iraq, depending on security conditions in the country.

BAGHDAD CLASHES

More than 3-1/2 years after the March 2003 invasion that toppled Saddam Hussein, about 140,000 American troops remain in Iraq fighting an insurgency and trying to stop savage sectarian strife between Shi'ites and Sunnis.

Democratic former Rep. Lee Hamilton, who co-chaired the group with former U.S. secretary of state James Baker, suggested events are slipping away from the United States.

In Baghdad on Wednesday, fierce clashes erupted between Shi'ite militias and residents of a Sunni neighborhood after a mortar barrage that wounded five people and mortar rounds fell on the central Midan district of the capital, killing 10 people and wounding 54.

"The current approach is not working and the ability of the United States to influence events is diminishing," Hamilton bluntly told a news conference. "No course of action in Iraq (is) guaranteed to stop a slide toward chaos."

Bush has been under acute political pressure to change course in Iraq since the November 7 elections, when U.S. voters, soured on the war, ended Republican control of Congress.

"This report gives a very tough assessment of the situation in Iraq," Bush said after meeting with the group. "I told the members that this report, called 'The Way Forward,' will be taken very seriously by this administration."

Analysts suggested that the report would add to pressure on Bush to find a solution to a conflict that has already lasted longer than the U.S. involvement in World War Two.

"This could provoke an earthquake and leave the president very isolated if he refuses to change course," said Jon Alterman of the Center for Strategic and International Studies think tank in Washington.

In the clearest sign Bush is searching for solutions, a day after the Republicans' humiliating election losses he tapped former CIA Director Robert Gates to replace Defense Secretary Donald Rumsfeld.

The idea that the United States begin to withdraw troops from combat in Iraq rests on what analysts regard as a highly questionable assumption that Iraqi security forces are capable of taking over responsibility and staunching the bloodshed.

While acknowledging Iraq will need U.S. aid for some time, the group said the United States should curb support if its government does not take on more responsibility.

"The United States must not make an open-ended commitment to keep large numbers of American troops deployed in Iraq," it said. "The Iraqi government needs to show its own citizens -- and the citizens of the United States and other countries -- that it deserves continued support."

(Additional reporting by Ross Colvin in Baghdad)