Taliban militants have regrouped in Afghanistan turning it into a hot bed of insurgency, with the result that the strife-torn country now rivals Iraq as the biggest concern for American policymakers, a media report said on Saturday.

Pentagon's first assessment of conditions in Afghanistan since the invasion began in 2001, in the form of a new defence report, reveals that fundamentalists have 'coalesced into a resilient insurgency' in the country, it said.

The turnaround poses a dilemma for Bush administration, which had counted Afghanistan as the pinnacle of its success in the war on terror, the Wall Street Journal said, quoting the report.

The report, it said, paints a grim picture of the conflict, concluding that Afghanistan's security conditions have deteriorated sharply while the national government in Kabul remains incapable of extending its reach throughout the country or taking effective counter-narcotics measures.

US commanders say they need more forces, which they can only be provided by withdrawing troops from Iraq. As a result, the administration may have to choose between accepting a smaller US presence in Iraq or facing the prospect of turmoil in Afghanistan, the Journal said.

Senior Pentagon officials and military commanders have ordered a top-to-bottom review of US strategy in Afghanistan, the paper said and quoted a senior military official familiar with the review as saying that it was prompted by high-level concern that US 'was losing ground and slipping backwards'.

Taliban activity had once been limited to small portions of Afghanistan, but US officials acknowledge that insurgency has now spread to once-stable parts of the country.