"It is unfortunate that we are in civil war," Mr Allawi told BBC television on the eve of the third anniversary of the US-lead invasion that overthrew Saddam Hussein's dictatorship.
"We are losing each day an average 50 to 60 people throughout the country, if not more," he said. "If this is not civil war, then God knows what civil war is."
Mr Allawi said he had warned against a political vacuum in Iraq, and expressed concern over the dismantling of Saddam's armed forces and prevalence of militia groups.
Iraq was "edging towards" a deal between its political factions to secure a national unity government, but that would not represent "an immediate solution" to its post-invasion problems, Mr Allawi said.
"Iraq is in the middle of a crisis," he said.
"Maybe we have not reached the point of no return yet, but we are moving towards this point. We are in a terrible civil conflict now."
"It will not only fall apart, but sectarianism will spread throughout the region, and even Europe and the United States would not be spared all the violence that may occur as a result of sectarian problems in this region."
Contrasting opinions
But US and British leaders rejected claims the country is sliding into civil war, and said they remain optimistic that a stable democratic society can emerge.
British Defence Secretary John Reid, who is visiting Iraq, has insisted that civil war was neither imminent nor probable despite increased violence between factions.
"There is no civil war, it isn't imminent, it isn't likely, although there has been an increase in sectarian violence," Mr Reid told Sky News television from Iraq.
Iraqi President Jalal Talabani and the top US military commander in Iraq also said civil war is not underway.
"We're a long way from a civil war and we are working towards a formula for a national accord" government, Mr Talabani said.
"I personally don't believe, one, that we're there now (in a civil war), two, that civil war is imminent and, three, that it is inevitable that it will happen," General George Casey told Fox News television.
US Vice President Dick Cheney told CBS Sunday that ongoing violence only reflects "desperation" by Al-Qaeda to foment civil war.
"That's been their strategy all along, but my view would be they've reached a stage of desperation. They are doing everything they can to stop the formation of a democratically elected government. I don't think they've been successful," Mr Cheney said.
President George W Bush said his government has a strategy for "victory in Iraq" and said he had been informed by US ambassador to Iraq Zalmay Khalilzad "of the progress the Iraqis are making toward forming a unity government."
"We are implementing a strategy that will lead to victory in Iraq and a victory in Iraq will make this country more secure and will help lay the foundation of peace for generations to come," the president told reporters on the White House lawn.
Latest polls
The Bush administration is facing rising doubts about its Iraq policy following weeks of deadly violence across the country.
US opinion polls this week showed support among Americans for Mr Bush and the war have plunged to all-time lows.
On Sunday, Newsweek magazine's newest poll showed that approval of Mr Bush's handling of Iraq plummeted to 29 percent while those who disapprove of his Iraq policy shot up to 65 percent.
A Wall Street Journal/NBC News poll Thursday put Mr Bush's overall approval ratings at 37 percent.