A progress report by the Independent Monitoring Commission (IMC) said the IRA was still engaged in spying that was authorised by the leadership, and organised crime, including counterfeiting and smuggling.
But the IMC said it was satisfied IRA leaders still intended to "eschew terrorism" and had "a clear strategic intent to turn the organisation onto a political path", despite evidence that individual members had retained weapons.
’Encouraging signs’
Britain’s Northern Ireland Secretary Peter Hain described the report as "very encouraging" and said it showed that "the IRA is moving in the right direction: no murders, no recruitment, no bank robberies. Compared to where the IRA was, there has been a sea change".
Mr Hain said the report would inject new momentum into talks starting next Monday aimed at restoring power-sharing between Northern Ireland's Catholic and Protestant communities, which was suspended in 2002.
But he conceded there would not be "an executive up and running tomorrow".
A spokesman for British Prime Minister Tony Blair, said: "Most of the signs are positive. The dynamic is very firmly in the right direction."
But Mr Blair added: "Let me make it clear once again: all criminal activity has to cease."
Northern Ireland's biggest unionist party gave the report a chilly reaction and seized on the allegations of spying and criminality.
"Far from being a clean bill of health, the Independent Monitoring Commission's report reaffirms what we already know -- that the Provisional IRA is riddled with illegality," Democratic
Union Party Leader Ian Paisley said.
Dublin and London had hoped that the watchdog's findings would help build trust between opposing parties and kick-start talks on reviving a mothballed provincial government in which pro-Irish and pro-British opponents once shared power.
The BBC on its website reported that the IRA has denied claims that it held onto some weapons after its decommissioning of arms last year.
Disarmament pledge
The IRA, responsible for about half of 3,600 killings during Northern Ireland's 30-year conflict, said it was sticking to last year's pledge to pursue its aim of ending British rule in the province through peaceful and democratic means.
"Recent allegations that the IRA is in breach of its public commitments are false," it said. Sinn Fein, the IRA's political ally, also dismissed the report, saying it lacked evidence for its allegations.
Sinn Fein’s chief negotiator, Martin McGuinness, said the report showed the IMC was "absolutely hostile to Irish republicanism, the movement by the Catholic community to reunite Northern Ireland with the republic in the south.
"It's like the white man talking to the natives," he said.
The IMC report also said other paramilitary groups had made much less progress than the IRA.
Smaller dissident republican groups such as the Continuity IRA and Real IRA had been responsible for hoax devices targeting the police or military, and continued to use violence to impose discipline and exert control within local communities, it alleged.