DFID spends more than £1bn a year on aid to 'insecure' countries
The government's aid work in dangerous countries needs to change if it is to be more successful, a report by Whitehall's spending watchdog says.
Projects which rely on work with local agencies are open to corruption because it was dangerous to keep a check on them through site visits, it said.
In one Iraq project, £500,000 was lost due to fraud involving local officials.
The Department for International Development said it was reviewing the way it works in fragile states.
The report from the National Audit Office said DFID is diverting increasing sums of aid - more than £1bn a year - to "insecure" countries such as Iraq, Afghanistan and Sudan.
It said in some areas, like healthcare, it had made progress but was failing to make major advances on tackling poverty in the most dangerous countries.
Part of the problem was a reliance on local government agencies and voluntary organisations for projects where it was hard to make site visits to guard against corruption.
The report said two-thirds of projects it reviewed "had problems arising from weak partner capacity".
One example was a £4m project to create jobs in southern Iraq in which £500,000 had to be written off because of a year-long fraud involving local officials.
The report said after the security situation had deteriorated to such an extent that planned spot checks became impossible and in some provinces "the number of work days created was far lower than sub-contractors reported".
In the end DFID investigations "reported reasonable confidence that £1m of the £4m had been spent as planned. There was either a lack of evidence or indications of misuse for the remainder."
The report said: "Higher risks run in insecure environments have led to lower project success rates."
And it was not clear how assessments of conflicts in "insecure" countries then influenced the way projects were managed.
"In order to improve the effectiveness of aid operations, DFID needs to apply the lessons from practical experience more quickly, for example by better assessing and managing security risks and finding new ways to keep track of progress when site visits are dangerous," the report said.
The NAO also said more could be done to improve the safety of DFID staff, highlighting an incident in Kinshasa, Democratic Republic of Congo, where staff and consultants were trapped in their homes when fighting erupted.
One staff member later said it was "only by the grace of God" none of them had been killed or seriously injured.
NAO head Tim Burr said: "DFID staff work hard, often in difficult and dangerous situations, to deliver real benefits to some of the world's most vulnerable people.
"DFID could still make better use of its teams' growing experience in this field to adapt standard aid practices to meet the challenges presented by insecurity."
Shadow International Development Secretary Andrew Mitchell said: "Today's report makes clear that DFID needs urgently to improve its performance in conflict zones like Iraq and Afghanistan. It is clear that DFID needs to learn new skills and up its game."
He praised staff but said "radical policy and management improvements" were needed.
A spokesman for DFID said it was finalising a review of the way it works in insecure environments and fragile states.
Later International Development Secretary Douglas Alexander told BBC Radio 4's World at One programme that they were "by very definition, very difficult environments in which to work".
"That's why we are consistently looking at our systems, constantly monitoring the resources and making sure that we take whatever steps we can to make sure that British taxpayers' money is being spent effectively."
But he added: "It is a matter of real pride in the Department for International Development that the bodies charged with examining international aid agencies ... pretty much regard Britain's Department for International Development as the gold standard in terms of spending money effectively."