Sectarian violence was driving more people to flee, both for other areas of Iraq or abroad, with some 140,000 estimated to abandon their homes every month, according to the UN High Commissioner for Refugees.
"UNHCR officials who just returned from the region warned that we are now facing an even larger humanitarian crisis than we had initially prepared for in 2002-03," chief UNHCR spokesperson Ron Redmond was quoted as saying in a statement.
"Yet we're sorely lacking in funds to cope with the growing numbers of displaced and increasingly desperate Iraqis needing help both within and outside their country," he added.
While the UN agency had a budget of US$154 million (A$200 million) for a feared exodus during the US-led invasion, it now has only a budget of $29 million to help Iraqi refugees, and that has only been 60 percent funded.
The international community has pledged billions for reconstruction and development, but much of that has not been spent due to the security situation, and humanitarian programs have been neglected, the statement said.
"We're now calling for a renewed focus on the humanitarian crisis in the region," said Mr Redmond, adding that the agency had briefed donor countries about its concerns.
Its funding gap has already forced UNHCR to suspend some activities, and some of its employees have agreed to defer drawing their salaries to ensure aid continues to reach refugees.
UNHCR estimates there are at least 1.6 million Iraqis displaced internally, and up to 1.8 million in neighbouring states.
Some 2,000 Iraqis arrive in neighbouring Syria every day, and an estimated 1,000 a day in Jordan, the agency said.
Unless a modicum of security is introduced and the humanitarian situation improves, the agency fears many more Iraqis may flee their homes.
"We fear hundreds of thousands more Iraqis who have waited to see an improvement in the situation are now teetering on the brink of displacement," warned Mr Redmond.
"Many urban professionals have already fled. Doctors, teachers, computer technicians and other skilled people crucial to the country's stability and well-being are leaving," Mr Redmond noted.