WASHINGTON In a report to be released next week, the Fund for Peace calls for the “managed” break-up of Iraq into three separate states with their own governments and representatives to the United Nations, but continued economic cooperation in a larger entity modeled on the European Union.

Prospects of Iraqi leaders being able to establish a multiethnic democracy are now “fanciful,” the nonpartisan Washington think tank says in its report titled “A Way Out: The Union of Iraqi States.” Based on data tracked monthly since before the U.S. invasion in 2001, the report authored by Fund for Peace President Pauline Baker concludes that Iraq is now “near total collapse.”

“While there may be pockets of improvement from the ‘surge,’ these are transitory and limited achievements that are about four years too late … Rather than fight fragmentation, it would be better to manage the trend with a view toward establishing an entirely new political order,” the report says.

The report is one of several official and unofficial Iraq assessments coming over the next month, culminating with the Bush administration’s own much-awaited evaluation of Iraq’s security and political progress due on Sept. 15.

The military campaign under way with Gen. David Petraeus might have worked after the 2003 invasion, during a security vacuum and before militias emerged, but the Iraqi government’s lack of political will and inability to broker reconciliation have divided the country in irretrievable ways, the report says.

The Fund has monitored 12 indicators ranging from the economy to political factionalization and the rule of law and concludes that all have deteriorated significantly since before the war. Working out a transition that divides political power while continuing to allow Iraq’s three major communities Shiites, Sunnis and Kurds to share economic wealth may be the only way to bring U.S. troops home in the near future, the report concludes.

“This is the best, and possibly the last, chance to end the war, limit spillover and reduce U.S. troop presence, while leaving something constructive behind,” Baker writes.

The idea of an economic union would bypass the problem of dividing up current and future oil resources. There are a number of alternatives for Baghdad, the multiethnic capital, including making it the Brussels of Iraq as the headquarters for the new “Union of Iraqi States,” the report says.

Meanwhile in Iraq, U.S. troops clashed with suspected Sunni insurgents holed up in a mosque north of Baghdad and launched an air-to-ground Hellfire missile into the structure. One American soldier was killed in the fighting, the military said Friday.