Civil war is a more likely outcome in Iraq than democracy, Britain's outgoing ambassador in Baghdad has warned Tony Blair in a confidential memo.
The position is not hopeless but will be "messy", says Mr Patey
William Patey, who left the Iraqi capital last week, also predicted the break-up of Iraq along ethnic lines.
He did also say that "the position is not hopeless" - but said it would be "messy" for five to 10 years.
Mr Blair said the violence was designed to put extremists in charge rather than leaders committed to democracy.
"What should our response be? However difficult it is, stay the course, stand up for those people who want democracy, stand up for those people who are fighting sectarianism, stand up for a different vision of the Middle East based on democracy, liberty, the rule of law," he told reporters.
The Foreign Office said it did not comment on leaked documents but added that Iraqi security forces were getting more capable every day.
BBC correspondent Paul Wood said although the document does not contradict government denials that civil war is imminent, "it is a devastating official assessment of the prospects for a peaceful Iraq, and stands in stark contrast to the public rhetoric".
The bleak assessment of the country's future was contained in Mr Patey's final e-cable, or diplomatic telegram, from Baghdad.
The distribution list included the UK's prime minister, foreign secretary, defence secretary and House of Commons leader, as well as senior military commanders in both Iraq and the UK.
Mr Patey wrote: "The prospect of a low intensity civil war and a de facto division of Iraq is probably more likely at this stage than a successful and substantial transition to a stable democracy.
"Even the lowered expectation of President Bush for Iraq - a government that can sustain itself, defend itself and govern itself and is an ally in the war on terror - must remain in doubt."
Talking about the Shia militias blamed for many killings, Mr Patey added: "If we are to avoid a descent into civil war and anarchy then preventing the Jaish al-Mahdi (the Mahdi Army) from developing into a state within a state, as Hezbollah has done in Lebanon, will be a priority."
The cable says that "the next six months are crucial" - an assessment which is shared by the coalition's military commanders.
Senior military sources told the BBC it was "make or break" time in Iraq. The Americans are sending thousands of extra troops to Baghdad, starting next week.
The Conservative Party's head of policy, Oliver Letwin, called on ministers to be more honest about the situation.
"It's very difficult to offer the constructive support which we want to offer and for the public to understand what's going on if the government doesn't give a very clear and frank account of the assessment," he said.
Liberal Democrat foreign affairs spokesman Michael Moore said there needed to be a clear strategy for Iraq, including the engagement of neighbouring countries such as Iran, Syria and Turkey.
The Iraqi army has taken on some security duties
"Unless we seriously and radically rethink our approach, as the ambassador warns, we will run the serious risk of a descent into civil war," he said.
The BBC has also learned, from military sources, that British troops in Basra are planning to dramatically step up operations against Shia gunmen.
Mr Patey urges the government to ensure that Iraqi troops are brought into this effort as the British forces "can't confront the militias alone".
On Wednesday, President Jalal Talabani said Iraqi police and troops would be taking the security lead throughout the whole country by the end of the year.