In the relative safety of a municipal office protected by concrete blast walls and coils of razor wire, US troops, Iraqi officials and tribal sheikhs in flowing robes meet to discuss efforts to rehabilitate Baghdad's Sadr City district.

The Americans hand out a document for the Iraqis to sign, a pledge that they will work together to fulfil a vision: that the impoverished area becomes the "Jewel of the Tigris".

But instead of signing, the Iraqis repeat numerous complaints, arguing that reconstruction funds are being wasted, that promised projects never materialise and that members of their community languish in US detention centres.

Two years after President George W. Bush donned a flight suit and declared that "major combat operations" were over in Iraq, the nation bears the scars of a country still in conflict: the streets of Baghdad are as mean as ever, dotted with razor wire, and the protective cement blast walls overlooked by sandbagged turrets.

Multi-storey government buildings destroyed by US bombs two years ago remain wrecked, still strewn with rubble that no one has bothered to clean up, reminders of the conflict that was supposed to have ended. The mood among many Iraqis remains depressingly bleak.

"I swear to God nothing has changed," complains Kheir Allah, selling soft drinks on a nearby, garbage-strewn street. He said the hospital behind his stall had been repainted four times. Yet inside the paint was peeling from the hospital's ceiling. Hospital officials refused to talk.

A despondent female customer interrupts: "There's just a river of blood and we walk on it." The grim outlook is explained largely by unremitting insurgent attacks and the continued presence of US tanks and Humvees with jumpy, gun-toting US troops, which rumble down Baghdad's streets.

Combined, they create a climate of fear - the dread of being shot by nervous US soldiers or blown apart by suicide bombers. Dozens of people were killed in a spate of attacks last week.

It is not just the violence that fills Iraqis with disillusionment. When the US military ousted Saddam Hussein in April 2003, many had high, often unrealistic expectations of development after years of debilitating sanctions and oppressive rule.

Yet today, unemployment and criminal activity are rife, the economy is in tatters and, perhaps most significantly for ordinary Iraqis, unbearable electricity, fuel and water shortages seem as bad as they did 12 and 24 months ago.

Until there is improvement in these critical areas, many Iraqis will continue to question the worth of the US action. "When the invasion came, we prayed to God to give America victory. When we finished our prayer, the electricity was cut," says Salih Meshaan, who runs a car accessory shop in Sadr City, dubbed a priority "conflict city".

"You see," he says, pointing to a trench stretching down the street, part of an unfinished "reconstruction project" to improve a decrepit sewage system. "It's worse than before."

Dr Hayder Jabbor al-Kutbi, the council's health and environment officer, shares the same complaints: "We always hear that from the Americans, that they have a lot of money coming from America, but we do not see obvious projects. Our sewage network is so bad: tap water is mixed with sewage. . . . We expected that change would occur at the end of the first year but we were not sure it would happen, and now absolutely not."

The US and Iraq authorities have spent billions of dollars on projects like those in Sadr City, with electricity, water and sewage schemes to the fore.

Lt Col Jamie Gayton said the US had promised $800m (£422m) to Sadr City alone, about half of which has been spent. But on the ground, signs of improvement are not visible, despite the massive funds made available. There are numerous complaints of corruption and projects that are started but never finished.

The US has earmarked $21bn for reconstruction projects - equal to Iraq's estimated gross domestic product in 2004, according to the World Bank. Of that, $6.7bn has been disbursed and $15bn "obligated".

But despite the time and money invested in the reconstruction, the same complaints heard in the dog days of the summer after the war are still on everyone's lips two years later.

In Baghdad electricity is being rationed to three hours on, three hours off at best, no better than it was a year ago.

Around 4,100MW are being produced nationally - the same as 12 months ago - a US official says. Yet earlier this year, demand hit a high of 8,200MW. US officials blame the lack of progress on increased demand as electrical goods pour into the country, insecurity, fuel shortages and the state of Iraq's infrastructure.

They also acknowledge that serious miscalculations were made about the size of their task. "We have learned a lot," says William Taylor, the head of the US Iraq Reconstruction Management Office. "Clearly we are not where we would like to be, we would like to be much further on." Of the $21bn, $5bn is going to security reform training and equipping the police and army, as well as building bases, police stations and the inevitable blast walls. Of that, $1.8bn was redirected from other projects, including water and electricity.

Meanwhile, $8.9bn is earmarked for essential services - electricity, water, transport, telecommunications and oil. And last year, up to 30 or 40 per cent of funds for those sectors were being eaten up by security costs, a US official says, though now it is down to 10 or 20 per cent. The failure to deliver reconstruction has produced frustration among Iraqis and a shift in US thinking, with funds now directed towards more shorter-term projects to produce visible results, training programmes and the cancellation of "non-critical" longer-term schemes.

Mr Taylor says it is a question of striking a balance between "patience", accountability to the US taxpayer and showing results in the near term. The latest initiative is a pilot scheme whereby the US is providing project funding while an Iraqi ministry handles the tendering and monitoring process.

The plan is to increase Iraqi involvement and reduce the overhead costs - estimated to be 20-30 per cent - incurred when using western companies, mainly American, which then subcontract to regional and Iraqi firms.

The pilot began about a week ago with the housing and construction ministry for a contract - estimated at $51m - to repair two bridges and a highway. The bids from Iraqi companies were just over $30m, Mr Taylor says, suggesting that big savings could be made.

Funnelling money directly to Iraqi officials may increase the risks of corruption. Graft is endemic in Iraq, and contractors have been quick to take advantage of the vast sums flowing into the country, says Adel Hillawi, a senior Iraqi reconstruction official.

Some officials in the Iraqi government, which has spent about $4bn on reconstruction, estimated that 15 to 20 per cent of their funds would be lost to graft, according to Mr Hillawi.

"If people thought more about this country than their pockets, we would have leaped ahead," he says. "But if you ask me, I would say it is easier for contractors to take American money, because they don't have the experience on the ground."

He estimates that perhaps only 10 per cent or an "optimistic" 20 per cent of early US funds were actually spent on projects, due to contractor corruption, unfamiliarity with the country and overhead costs. The situation has improved in the last year, he adds.

"In the beginning the controls were terrible. Contractors would ask for $100,000 to fix a school when only $10,000 was needed and the Americans would give them a $50,000 downpayment. So contractors would say 'these people are gullible'," Mr Hillawi says. Additional reporting by Awadh al-Taee