"I believe the sectarian violence is probably as bad as I've seen it, in Baghdad in particular," said General John Abizaid, who heads the US Central Command.
General Abizaid offered the bleak assessment in a stormy hearing of the Senate Armed Services Committee.
The BBC reports the outgoing British ambassador to Iraq, William Patey, made a similar warning in a memo to Prime Minister Tony Blair.
During the hearing, Democrats also attacked the leadership of US Defence Secretary, Donald Rumsfeld.
Mr Rumsfeld later came under fire by Senator Hillary Clinton who accused him of painting a rosy picture of the situation in Iraq.
"Because of the administration's strategic blunders and, frankly, the record of incompetence in executing, you are presiding over a failed policy," she said.
Mr Rumsfeld hit back saying he never painted a rosy picture.
Latest violence
Insurgents detonated a series of bombs as fierce gunbattles erupted Friday in the northern Iraqi city of Mosul, leaving at least nine police officers dead, including the chief of Mosul’s police.
Mosul authorities have ordered everyone off the streets until tomorrow and closed the city's bridges across the Tigris river.
The United States recently announced that it was pulling over 3,500 troops from the US' 172nd Stryker Brigade out of Mosul to reinforce security operations in Baghdad.
A bomb near a busy Baghdad shopping district on Thursday killed at least 10 people and injured 29 others.
US commanders have recently moved 3,200 troops from Mosul to Baghdad to bolster security in the capital.
Struggle at "decisive" stage
The general said the struggle for Baghdad was at a "decisive" stage and required decisive action by Iraqis.
General Abizaid accused Iran of arming death squads and claimed militias have infiltrated the police.
He stressed that the deteriorating security situation in Baghdad required more US troops to bring the city under control.
"It is clear that the operational and the tactical situation in Baghdad is such that it requires additional security forces, both US and Iraqi," he said.
"I think the most important thing ahead of us throughout the remainder of the year is ensuring that the Baghdad security situation be brought under control," he said.
"It is possible to imagine some reductions in forces, but I think the most important thing to imagine is Baghdad coming under the control of the Iraqi government," he said.
But General Abizaid also warned that deploying US troops in Baghdad may mean higher US casualties.
He said he did not anticipate the levels of sectarian violence that Iraq is now experiencing.
"I believe that, a year ago, it was clear to see that sectarian tensions were increasing. That they would be this high, no," he said.
Senators voice concern
Republican Senator John McCain said the generals were merely moving troops from one trouble spot to another.
"What I worry about is we're playing a game of whack-a-mole here," said Senator McCain.
Senator John Warner, the committee's Republican chairman, chided Mr Rumsfeld and his generals for raising expectations that US force levels could be reduced significantly this year.
Senator Carl Levin, the ranking Democrat on the committee, called for the start of a phased withdrawal by the end of the year.
Mr Rumsfeld and his generals said the Iraqis ultimately would have to deal with the sectarian violence through a political reconciliation.
"We need for the Iraqis to seize this moment," said General Peter Pace, the chairman of the Joint Chiefs of Staff.
"I think they will seize the moment. I do not know how soon that will be."
General Abizaid said it may take five years to stabilize but he expressed confidence that Iraqis would settle their differences.
"The alternative is so stark," he said.
"It is a society that must move either towards equilibrium or break-up," he said. "I think it will move toward equilibrium."
Iraq's Shi'ites join march
As the generals made the warning, thousands of Shi'ites converged on Baghdad ahead of a major demonstration planned for Friday.
Shi'ite protesters were summoned to the capital by radical cleric Moqtada al-Sadr to protest against Israel's attacks on Lebanon.
He also wants a show of force against the US-led coalition force in Iraq.
The protest is timed to begin after Friday prayers and could bring tens of thousands onto the streets.
Australia committed
Defence Minister Brendan Nelson today reiterated the government's commitment to staying the course in Iraq no matter what the security situation.
"We've got sectarian violence, we've got terrorist activities that are being fomented by people outside the country and as far as Australia is concerned ... we are committed to this for the long haul," he told reporters.
"The Iraqi people have no less of a right to freedom and privileges that we enjoy in Australia than any other people in the world.
"We are determined to see that the ideological insanity that's driving the people who are causing violence in Iraq is brought to justice."
Dr Nelson shied away from describing the violence as civil war.
"I don't think it's appropriate to be trying to assign some sort of description to it," he said.
"It's obvious that we've got people from outside Iraq and within Iraq who are absolutely determined to see that Iraqi people don't have rights and freedom that we in our country take for granted."
Rather than Iraq heading into civil war, Opposition Leader Kim Beazley believes it has been there for some time.
"I would have said in response to the British ambassador's comments, the issue of a civil war (has) started in Iraq, it looks awfully like it has been going for a long time to me," Mr Beazley said.
"I do support withdrawing Australian troops from Iraq, they should not have been there in the first place.
"We shouldn't have been there in the first place and we should be out of it now."