The New York-based monitor said the US strategy, as well as fuelling terrorist recruitment, had hampered Washington's ability to pressure other countries into respecting international law.
"Fighting terrorism is central to the human rights cause," said Kenneth Roth, executive director of Human Rights Watch. "But using illegal tactics against alleged terrorists is both wrong and counterproductive."
The watchdog also criticised US allies in the war on terror for undermining critical international protections, citing Britain for seeking to send suspects to governments likely to torture and Canada for moves to dilute a new treaty outlawing enforced disappearances.
Russia, China, Saudi Arabia
The European Union was also taken to task for subordinating human rights in its relationships with others deemed useful in fighting terrorism, such as Russia, China and Saudi Arabia.
The annual report charged both Moscow and Beijing with exploiting the prevailing atmosphere to clamp down on political opponents by branding them "Islamic terrorists."
In its critique of US policy, Human Rights Watch dismissed the argument that cases of abusive interrogation could be put down to a small number of "bad apples" in the military when they were clearly "a conscious policy choice" by senior US government officials.
Mr Roth said evidence of that deliberate policy included the threat by
President George W Bush to veto a bill opposing "cruel, inhuman and degrading treatment," and moves by Vice President Dick Cheney to exempt the Central Intelligence Agency from the law.
"Responsibility for the use of torture and mistreatment can no longer credibly be passed off to misadventures by low-ranking soldiers on the nightshift," said Mr Roth.
"The Bush administration must appoint a special prosecutor to examine these abuses, and Congress should set up an independent, bipartisan panel to investigate," he added.
The annual Human Rights Watch report comprised a survey of human rights developments in more than 70 countries in 2005.
Outside the war on terror, the report documented numerous serious abuses, including the massacre of thousands of demonstrators in Uzbekistan in May and Sudan's "ethnic cleansing" policy in the region of Darfur.
"Persistent atrocities" were reported in the Democratic Republic of Congo and Chechnya, while "severe repression" continued in Burma, North Korea, Turkmenistan, and the Chinese regions of Tibet and Xinjiang.
The report also highlighted some bright spots in efforts to uphold human rights, including India's decision to suspended most military aid to Nepal after the king's coup.
The Association of Southeast Asian Nations was applauded for forcing Burma to relinquish its 2006 chairmanship because of its human rights record, and Kyrgyzstan for withstanding intense pressure from Uzbekistan to rescue all but four of 443 refugees from the Andijan massacre.