Mexican drug gangs have expanded their activities in the US with heroin production doubling in 2008, the US justice department says in a report.
Despite US funding for the war on drugs, trade in marijuana, ecstasy and methamphetamine also grew, the National Drug Threat Assessment said.
The report found that Mexican groups were active in every region of the US.
Gangs were moving an estimated $40bn (£27bn) in cash back into Mexico across the border each year, it added.
Mexico has long been the main conduit for illicit drugs smuggled into the US but this report suggests that the efforts to halt the flow on both sides of the border have had only a limited impact, the BBC's Richard Lister reports from Washington.
In 2007 the US pledged $1.4bn (£0.9bn) over three years to fight the drugs cartels but the following year heroin production in Mexico rose from 17 to 38 metric tonnes.
This, the report says, led to lower heroin prices and more overdose deaths in the US.
The report found that Mexican heroin was poised to take a "more significant share" of the market in US cities where South American heroin has traditionally dominated.
For Asian heroin, the US continued to be a secondary market, it said.
The assessment says that Mexican drug suppliers have increased their co-operation with American street and prison gangs to expand their distribution networks.
Speaking in Mexico City earlier this week, US Secretary of State Hillary Clinton called for more efforts to tackle the social issues such as poverty that fuel the drugs trade.
Mexico, which has some 50,000 troops engaged against the cartels, has suggested that American money and equipment has not arrived quickly enough.