Only lawless Somalia, whose weak U.N.-backed government controls just a few blocks of the capital, was perceived as more corrupt than Afghanistan in Transparency International's Corruption Perceptions Index.
Iraq saw some improvement, rising to 176 of 180 countries, up two places up from last year. Singapore, Denmark and New Zealand were seen as the least corrupt countries in the list based on surveys of businesses and experts.
In Afghanistan, President Hamid Karzai's inability or unwillingness to tackle cronyism and bribery the past five years have resulted in an increase of support for the Taliban insurgents. That has prompted calls by the Obama administration for Karzai to tackle the practice or risk forfeiting U.S. aid.
Since 2001, the U.S. Congress has appropriated more than $39 billion in humanitarian and reconstruction assistance for Afghanistan, according to a report by the U.S. Special Inspector General for Afghanistan Reconstruction. European nations send about 1 billion euros ($1.49 billion) a year, a total of 9 billion euros since 2002.
International donors are increasingly questioning how much of the billions of dollars in aid might have been misappropriated.
The report said examples of Afghan corruption ranged from the sale of government positions to daily bribes for basic services.
Karzai unveiled an anti-corruption unit and major crime fighting force on Monday after heavy pressure from Washington.
In reaction to the report, Ershad Ahmadi, the deputy director general of the High Office of Oversight and Anti-corruption in Afghanistan, said that "corruption is a phenomenon that will not go away overnight. It is a problem that will continue to be with Afghanistan for a long time.
"Until we achieve that sort of national awakening that business as usual is not in the interest of a peaceful and prosperous Afghanistan, you will not be able to achieve success in your anti-corruption campaign," Ahmadi said.
Robin Hodess, Transparency's director of policy and research, said Tuesday that for a country to improve on the corruption perceptions index, it is imperative that "citizens believe that they have a government that works for them."
The governments have to show "that there is the political will to respond to the needs of the people," Hodess said.
In Iraq, corruption has become widespread since the U.S.-led invasion that toppled Saddam Hussein in 2003 with scarcity of serious government measures against corrupted officials.
That has undermined the largest nation-building efforts with siphoning billions of dollars away from the country's struggling economy, increasing frustrations among Iraqis mainly over corruption, lingering violence and poor public services.
A Bertelsmann Foundation report used in the corruption index noted that in Iraq "non-security institutions remain weak and debilitated. The Iraqi leadership faces many structural constraints on governance, such as a massive brain drain, a high level of political division, and extreme poverty."
The United States, which was in 19th place compared with 18th last year, remained stable despite Transparency's concerns over a lack of government oversight of the financial sector.
The report also pointed out that the U.S. legislature is another reason for concern, as it is "perceived to be the institution most affected by corruption."
There were some bright spots in the new report - Bangladesh, Belarus, Guatemala, Lithuania, Poland and Syria were among the countries that improved the most.
Associated Press Writers Sinan Salaheddin in Baghdad and Fisnik Abrashi in London contributed to this report.
On the Net: http://www.transparency.org