Without a coherent strategy to address the urgent needs of displaced Iraqis, the opportunity to rebuild parts of the country liberated from ISIL may be lost, a new report has warned.

The report from the Minority Rights Group International and the Ceasefire Centre for Civilian Rights, released on Wednesday, highlights the dire situation facing millions of Iraqis amid the country's ongoing war against the Islamic State of Iraq and the Levant (ISIL, also known as ISIS) group.

"In the context of limited governance and continued insecurity, the opportunity afforded by the retaking of territory from ISIS is being lost," the report states. "If communities are unable to co-exist, Iraq may soon reach a point beyond repair."

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The United Nations estimates that there are more than 3.4 million displaced people living in Iraq, while 10 million are in need of humanitarian assistance. Depending on the intensity and scope of the conflict, that number could reach 13 million by the end of the year, said Lise Grande, the deputy special representative of the UN Secretary-General for Iraq.

"We estimate that three million people are living under ISIL control, and there are thousands of people who are caught between lines, desperately seeking safety and support," Grande told Al Jazeeera.

Financial pressures facing the central government in Baghdad and the government in Iraq's Kurdish region (KRG) have steadily ballooned as the war against ISIL has dragged on for two years, with an ensuing failure by the state to protect civilians' basic human rights, the report found.

"Collapse of the rule of law, widespread impunity, territorial or tribal disputes and the inability or sometimes unwillingness of the Iraqi government and KRG to respond to the sheer scale of the crises, have further complicated the protection of IDPs [internally displaced people] in Iraq," the report noted.

The study catalogued a host of problems facing displaced Iraqis, including overburdened infrastructure and public services, a scarcity of food, severely limited economic opportunities, and a collapse of local governing authorities in the face of continuing violence. The relentless pressure has spurred side conflicts to emerge, with harassment and intimidation of displaced people based on their religious and ethnic backgrounds.

Iraqis from the Sunni heartland of Anbar - who constitute the largest displaced population, numbering 1.4 million throughout the country - feel they have been abandoned by the central government, while also experiencing discrimination from other civilians due to "prima facie suspicion of ISIS affiliation", the report notes.

"The division of Iraq on sectarian lines continues apace," Mark Lattimer, the executive director of the Minority Rights Group International, told Al Jazeera. "Both forces loyal to the Shia-led government and the KRG are using the liberation of territories from ISIS to engineer demographic changes.

Families have exhausted their savings, and many are increasingly forced to contemplate whether they can continue to live in Iraq with dignity. Lise Grande, deputy special representative of the UN Secretary-General for Iraq

"The vast majority of Iraq's ... IDPs are being denied the possibility of returning to their homes, despite the fact that many of them have been liberated," he added. "Unless a coherent strategy for return and reconciliation is put in place, the possibility of a democratic, multicultural Iraq will be gone within the next few years."

Representatives for the central government and the KRG did not immediately respond to Al Jazeera's requests for comment.

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After Anbar, Iraq's second-largest IDP population is in the capital Baghdad, where nearly 600,000 displaced people face risks that include suicide bombings, abductions and killings by armed groups. More than 3,400 people were reportedly killed in Baghdad last year.

At the same time, free movement and access to critical services have proved challenging for many displaced Iraqis, amid onerous identification requirements that may be impossible to fulfill for people who fled in haste without passports or national identity cards.

The report calls on the Iraqi government and the KRG to take a number of steps to alleviate the crisis, including implementing "reasonable, non-discriminatory" entry procedures at governorate borders, developing a strategy to support the integration of displaced people, and making arrangements to allow for the safe, voluntary return of displaced Iraqis to their home regions.

It also calls for "urgent funding" to the UN and other international agencies working with Iraqi authorities.

"Humanitarians are profoundly concerned about the millions of Iraqis who are trapped in areas where organisations are unable to provide assistance because the areas are unsafe and insecure, including areas controlled by ISIL," Grande said, noting as the crisis in Iraq enters its third year, the UN has launched an appeal for more than $860m to help cover basic humanitarian needs.

"Families have exhausted their savings," she said, "and many are increasingly forced to contemplate whether they can continue to live in Iraq with dignity."

Follow Megan O'Toole on Twitter: @megan_otoole