Nouri Maliki (left) has demanded nations reopen embassies
UN chief Ban Ki-moon has praised progress in Iraq at a UN forum in Sweden on the situation in the country.
Mr Ban said Iraq was "stepping back from the abyss that we feared most" but warned the situation "remains fragile".
Iraqi Prime Minister Nouri Maliki called for debt cancellation, mainly from Arab nations.
Nearly 100 countries are taking part in the forum, which is aimed at supporting Iraq's efforts to restore stability and
rebuild a functioning economy.
Correspondents say progress in these areas remains fragile.
The UN called the conference to review a five-year package it brokered last year, called the International Compact with Iraq.
Iraqi PM Nouri Maliki called on neighbouring countries to Iraq's forgive debts and waive compensation payments for wars fought under Saddam Hussein.
Ban Ki-moon has praised international efforts in supporting the rebuilding of Iraq
"Iraq is not a poor country. It possesses tremendous human and material resources, but the debts of Iraq... which we inherited from the dictator, hamper the reconstruction process," he said.
Iraq owes more than $60bn (£30.4bn) debt in total, with Kuwait and Saudi Arabia among the biggest creditors. It also owes about $28bn in compensation claims dating from the 1991 Gulf War.
Swedish officials had earlier played down the possibility of new initiatives at the meeting, and Foreign Minister Carl Bildt said debt was not its subject.
Meanwhile US Secretary of State Condoleezza Rice urged countries to stand by Iraq during reconstruction.
She said Iraq was "making good progress" but "challenges" remained.
But Iran's foreign minister blamed the US-led coalition's "mistaken policies" for the "grave" situation in Iraq, the Associated Press reported.
Mr Ban opened the conference, in Upplands Vasby, about 25km (15 miles) north of Sweden's capital, Stockholm, with an upbeat assessment.
"If we had to use one word to describe the situation in Iraq today I would choose... hope," he said.
Paris Club Group of 19 developed countries owed $37bn in 2004, now reduced to about $13bn
Arab nations: Status and amount of debts unclear, total estimated at $50-70bn:
Saudi Arabia: $25-30bn
1991 Gulf War reparations: Iraq owes $28bn to Kuwait and other countries
Source: Jubilee Iraq
"There is new hope that the people and government of Iraq are overcoming daunting challenges and working together to rebuild their country."
On the eve of the forum the largest Sunni Muslim bloc suspended talks on rejoining Iraq's Shia-led government.
A number of demonstrations were planned in the Stockholm area and close to the conference centre against the continued US presence in Iraq.
The gathering follows up on a conference in May 2007 at the Egyptian Red Sea resort of Sharm el-Sheikh, where the Iraq Compact was launched.
On security, optimism has been growing in Iraq that progress is at last being made, with ceasefires in Sadr City and Basra still holding, and the Iraqi government claiming some success in clearing al-Qaeda from the northern city of Mosul.
The US military says violence in Iraq is at its lowest levels for four years.
The conference was expected to put pressure on Mr Maliki's government to push ahead with political reconciliation between Sunni Arabs, Shia and Kurds, while continuing the clampdown on both Sunni and Shia extremism.
Anti-terrorist police were brought in as part of the security preparations
But on the eve of the conference the leader of the largest Sunni bloc suspended talks on rejoining the government, saying there was a dispute over which posts his followers would be given.
Adnan al-Dulaimi, who heads the Sunni Accordance Front in the Iraqi parliament, said Mr Maliki had refused to allow his bloc to resume leadership of the planning ministry.
Between them, the three parties that make up the bloc hold 44 of the 275 seats in parliament.
Ali al-Adeeb, a Shia MP close to Mr Maliki, played down the bloc's decision, saying it was "not a big step backward".
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