The measure passed 223-201 in the Democratic-controlled House despite a veto threat from President Bush, who has ruled out any change in war policy before September.
"The security situation in Iraq remains complex and extremely challenging," the administration report concluded. The economic picture is uneven, it added, and the government has not yet enacted vital political reconciliation legislation.
The unsatisfactory grades include failure to pass laws to share oil revenue, to reduce sectarian violence and to purge militia members from the police, reports CBS News chief White House correspondent Jim Axelrod.
As many as 80 suicide bombers per month cross into the country from Syria, said the interim assessment, which is to be followed by a fuller accounting in September from Gen. David Petraeus, the top U.S. military commander in the region.
Talk of U.S. troops pulling out quickly strikes fear in the hearts of Iraqi politicians, Pizzey adds.
"I think the result is damaging the reputation of the United States world-wide," said Tariq al-Hashemi, Iraq's vice president. "At the same time creating a possibility that my country might slide into civil war or to a security chaos."
A resolute President Bush pushed aside the mixed progress report on Iraq, declaring he will not yield to mounting pressure to leave, adds Axelrod.
"I believe we can succeed in Iraq, and I know we must," the president said at a White House news conference at which he stressed the interim nature of the report.
Describing a document produced by his administration at Congress' insistence, he said there was satisfactory progress by the Iraqi government toward meeting eight of 18 so-called benchmarks, unsatisfactory progress on eight more and mixed results on the others.
To his critics — including an increasing number of Republicans — he said bluntly, "I don't think Congress ought to be running the war. I think they ought to be funding the troops."
Democrats saw it differently.
A few hours after President Bush's remarks, Democratic leaders engineered passage of legislation requiring the withdrawal of U.S. combat troops to begin within 120 days, and to be completed by April 1, 2008. The measure envisions a limited residual force to train Iraqis, protect U.S. assets and fight al Qaeda and other terrorists.
The vote generally followed party lines: 219 Democrats and four Republicans in favor, and 191 Republicans and 10 Democrats opposed.
"The report makes clear that not even the White House can conclude there has been significant progress," said Speaker Nancy Pelosi, D-Calif.
To President Bush and others who seek more time for the administration's policy to work, she said, "We have already waited too long."
Republicans sided with Mr. Bush — at least for now. The bill "undermines Gen. Petraeus, undermines the mission he has to make America and Iraq safe," said the House GOP leader, Rep. John Boehner of Ohio. "What we have here is not leadership, it's negligence."
The 25-page administration report was issued in the fifth year of a war that has claimed the lives of more than 3,600 U.S. troops and is costing U.S. taxpayers an estimated $10 billion a month.
President Bush announced last winter he was ordering thousands of additional troops to the war zone, but the full complement has only arrived in recent weeks. "The full surge in this respect has only just begun," the report said.
It warned of "tough fighting" during the summer as U.S. and Iraqi forces "seek to seize the initiative from early gains and shape conditions of longer-term stabilization."
The president sampled the report at his nationally televised session with reporters.
"Iraqis have provided the three brigades they promised for operations in and around Baghdad. And the Iraqi government is spending nearly $7.3 billion from its own funds this year to train, equip and modernize its forces," he said.
But in other areas, he added, they "have much more work to do. For example, they've not done enough to prepare for local elections or pass a law to share oil revenues."
The report was blunt at points and more opaque at others.
While Iraq has begun to show progress in providing services, "citizens nationwide complain about government corruption and the lack of essential services, such as electricity, fuel supply, sewer, water, health and sanitation."
At another point, it added, "The prerequisites for a successful militia disarmament program are not present."
In addition to citing a Syrian connection for terrorists, it also said Iran has continued to foster instability in Iraq.
It cited measured progress on the economic front. "Unemployment has eased slightly and inflation is currently abating," the report said. It omitted mention of a June 1 Pentagon report estimating an annual inflation rate at 33 percent and the Iraqi government estimate of joblessness at 17 percent.
In an evident jab at critics of Bush's war policies, the report also said progress toward political reconciliation was hampered by "increasing concern among Iraqi political leaders that the United States may not have a long term-commitment to Iraq."
Despite rising pressure from Republicans in Congress for a change in course, President Bush was adamant.
"When we start drawing down our forces in Iraq, it will (be) because our military commanders say the conditions on the ground are right, not because pollsters say it'll be good politics," he said.
Before Thursday's House vote, GOP aides said they hoped to suffer only a few party defections, but the administration faces a more volatile situation in the Senate. There, three Republicans have already said they intend to vote for a separate withdrawal measure, and several others have signed on as supporters of a bipartisan bill to implement a series of changes recommended last winter by the Iraqi Study Group.
The Senate is expected to take up the bill next week and could vote as early as Wednesday.
Sen. Pete Domenici, R-N.M., who announced his intention to seek a change in policy last week, issued a statement that said the administration's most recent assessment "confirms my worst fears that while the Iraqi government is making some progress on some benchmarks, it's not moving fast enough to make meaningful or lasting progress."
Even so, it appears the president's allies have the support to block a final Senate vote in a showdown expected next week.
If the report changed any minds in Congress, it was not immediately apparent.
"It is time for the president to listen to the American people and do what is necessary to protect this nation. That means admitting his Iraq policy has failed, working with the Democrats and Republicans in Congress on crafting a new way forward in Iraq and refocusing our collective efforts on defeating al Qaeda," said Majority Leader Harry Reid, D-Nev.
But Sen. Mitch McConnell of Kentucky, the Republican leader, said Congress has already decided it will be September before the administration's strategy can be evaluated properly. "Certainly the young soldiers and Marines risking their lives today on the streets of Baghdad and Ramadi would agree — and they deserve our patience."