"It is likely that Shiite militants were responsible for more civilian casualties than those associated with terrorist organizations. Shiite militants were the most significant threat to the coalition presence in Baghdad and southern Iraq," states the report.

The single most dangerous militia is Jaysh al-Mahdi, the armed group started by cleric Muqtada Sadr, whose organization holds a signficant number of leadership posts in the Iraqi government.

"Jaysh al- Mahdi ... has replaced al-Qaida in Iraq as the most dangerous accelerant of potentially self-sustaining sectarian violence in Iraq. JAM exerts significant influence in Baghdad and the southern provinces of Iraq and on the government of Iraq," states the report.

Nevertheless, coalition forces are not permitted to target JAM wholesale. The rules of engagement only allow U.S. forces to capture, kill or fire on JAM members engaging in or preparing for hostile acts, said Marine Lt. Gen. John Sattler, the Joint Staff director of strategic plans and policy.

What to do about the broader Sadr organization is the subject of "a lot of intense discussion" between the U.S. and Iraqi governments, said Peter Rodman, the assistant secretary of defense for national security.

Iraqi Prime Minister Nouri al-Maliki "understands it is something he has to confront," Rodman said, noting a Maliki speech this weekend expressing frustration with Sadr's forces.

It is not the U.S. military's call to decide what to do about the group, estimated to have 40,000 fighters, many of them disaffected, poor and uneducated Shiite young men.

"It's a policy decision to declare (JAM) a 'hostile organization,'" said Sattler.

There is some reluctance to declare JAM hostile. It is not clear that Sadr has operational control over the death squads associated with JAM, Sattler said.

Despite the threat posed by the organization, targeting Sadr's forces as a group could unleash even more violence in Baghdad and across the relatively calm Shiite southern Iraq.

Whether Maliki has the will or the influence to demobilize the militias is unclear because people within his own government support them.

"Some Iraqis have joined the political process but condone or maintain support for violent means as a source of political leverage," the report states.

Sectarian violence exploded in the wake of the February 2006 bombing of the Shiite Golden Dome Mosque in Samarra. That attack unleashed a cycle of retributive attacks, with most of the victims being civilians who have been killed execution style by death squads.

Those death squads were blunted by a joint American-Iraqi offensive in Baghdad undertaken in August known as Operation Together Forward II, but they recovered shortly thereafter.

"As the operation progressed , death squads adapted to the new security environment and resumed their activities in areas not initially targeted by OTF II," states the report, "Measuring Stability and Security in Iraq."

The death squads got a hand from elements within the Iraqi police service "who facilitated freedom of movement and provided advanced warning of upcoming operations. This is a major reason for the increased levels of murders and executions," the report states.

The total number of attacks recorded by U.S. troops against them, Iraqi security forces, or Iraqi civilians has increased 22 percent, with the overwhelming majority of casualties suffered by Iraqis. Sixty-eight percent of the attacks target Americans but they have body armor, armored vehicles and weapons to protect themselves. Nevertheless, coalition casualties have increased 32 percent this quarter.

"Attack levels, both overall and in all specific measurable categories, were the highest on record during this reporting period" due in part to the annual spike in violence during Ramadan.

Iraq has trained and equipped 322,600 Iraqi soldiers and police but the number of those on duty on any given day is "much lower," due to scheduled leave, desertion and attrition.

After subtracting those killed or wounded in battle and those who have quit the force, Sattler said there are 280,000 forces available. Of those, about 90,000 are on scheduled leave at any one time.

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