According to the Stockholm-based think tank, military spending rose to $956 billion, which the group called a "remarkable increase."
"It's very close to the Cold War peak in 1987," said SIPRI researcher Elisabeth Skoens, who co-authored the annual report.
Individually, the United States led the world in defense spending, accounting for 47 percent, followed by Japan with 5 percent, and Britain, France and China, each with 4 percent.
Skoens said the increase in U.S. spending was the result of missions launched in Afghanistan and Iraq, along with the war on terror.
But the report said that ethical concerns about pre-emptive warfare, as well as practical budgetary considerations, might slow spending growth n coming years.
"While U.S. military expenditure is set to continue to grow and will continue to propel world military spending, the pace is likely to fall back somewhat in the next few years," it read. "In the longer term it is doubtful whether current levels will be economically and politically sustainable."
The report by the think tank also singled out the threat posed by weapons of mass destruction, but found that the Iraq invasion may have caused some countries to rethink their own plans for WMDs given the willingness by the United States and others to use force.
It cited Libya, which last year admitted it had been seeking nuclear weapons but agreed to renounce their use and dismantle its own program as one example of how the threat of force, combined with behind-the-scenes talks, could hinder their development and spread.
"Perhaps luckily, evidence of past and present WMD problems in ... Iran, Libya and North Korea was strong enough to maintain the momentum of international cooperation against the proliferation menace — and many states were motivated to work for less violent solutions," wrote Alyson J.K. Bailes, the think tank's director.
SIPRI said that while the invasion may have served as warning to other states with WMDs, it could have the reverse effect in that some states may see an increase in arsenals as the only way to prevent a forced regime change.
The report said the March 2003 invasion of Iraq was an example of U.S. military might, but noted that the postwar occupation, which has seen hundreds of coalition soldiers killed in attacks by insurgents, was evident that control there remained haphazard at best.
"The ongoing violence in Iraq and the continuing disputes between the country's political, religious and ethnic groups could, however, also result in continuing instability within Iraq," said Andrew Cottey, whose report detailed the effect of the invasion and its aftermath.
He warned that instability in Iraq could spread and bring civil war to neighboring states.