This was the year in which the US admitted it was not going to defeat the insurgency. It was the ebb tide of American and British power in Iraq. By the end of the year both countries were urgently looking to withdraw their troops in circumstances not too humiliating to themselves and without precipitating the complete collapse of the Iraqi state.

The failure of the US and Britain to win the war does not mean that the two-and-a-half year uprising among the Sunni Arabs has achieved all its aims. The beneficiaries from President George W Bush's invasion of Iraq in 2003 are not the Sunni but the Iraqi Shia and the Kurds. Outside Iraq, the country which has gained most from the fall of Saddam Hussein is Iran.

The year began and ended with elections. The first, on 30 January, was critical in demonstrating the electoral power of the Shia community. The United Iraqi Alliance, a coalition of Shia parties, triumphed. This was hardly surprising since the Shia make up 60 per cent of the Iraqi population. But it was a political earthquake in Iraq after so many centuries of Sunni dominance. The verdict of the January poll was confirmed by the election on 15 December for the National Assembly, which will sit for four years.

The political landscape of post-Saddam Iraq is becoming clearer but the country still looks as if it will be a very violent place. A striking feature of present-day Iraq is that there are multiple centres of power, which as they conflict create numerous friction points. Authority is fragmented. The US has power, but so do the three main communities: the Sunni and Shia Arabs and the Kurds. This much is very evident on the ground in Baghdad. In a Sunni district of west Baghdad, the local police pack up and go home at 8pm. "I am leaving now and the resistance will take over," explained one policeman as he got into his car. "If I stayed around here I would be killed." In Ramadi, the capital of rebellious Anbar province, west of Baghdad, insurgents took over the city centre for four hours in December, despite the presence of powerful US and Iraqi military units.

Precisely where real power lies in Iraq is not always obvious. In Basra the British forces are supposedly helping to build up the local police, but a confrontation in October sparked when two British soldiers, working undercover and in disguise, were arrested by the Iraqi police and then rescued by the Army, demonstrated the real state of affairs. Film of a British soldier, his clothes burning as he jumped from a blazing armoured vehicle, was shown around the world. It is the Shia political parties and their militias in and out of the police who are the real masters of Basra and southern Iraq. The growing power of the militias is evident everywhere; so too is the influence of Iran. At some point, a new balance of power between the main communities, the militias, political parties, the foreign powers, the insurgent groups and the secret intelligence services will emerge in Iraq. It has not happened yet. The new rules of the game are not yet agreed. To give one example: the government has declared that the weekend will now fall on Friday and Saturday. But in western Iraq insurgents say it falls on Friday alone, and anything else is un-Islamic. They have threatened to kill headmasters who do not open their schools on Saturdays.

There are also more serious disagreements. In northern Iraq, territory is disputed between Arabs and Kurds. The Kurds captured the oil city of Kirkuk, the so-called jewel of Kurdistan, in the war of 2003. They will not give it up. The future of the city and of the Turkoman and Arab communities living there is still disputed.

But not all divisions in Iraq are getting wider. Sunni and Shia leaders now appreciate, in a way that they did not two years ago, that the Kurds, 20 per cent of the Iraqi population, already have quasi-independence. Most Kurds in the street would prefer outright autonomy. The main reasons their leaders want to stay inside Iraq for now is fear of neighbours like the Turks, the need to keep in with the US - and access to oil revenues.

The US is learning to play communal politics. The US ambassador Zilmay Khalilzad, appointed this summer, is far more adept at this than the preceding envoys. The US has learned in the last two-and-a-half years that it may have been easy to overthrow Saddam Hussein, but it is dangerous to buck the Kurds, the Shia or the Sunni. During the rancorous negotiations on the new Iraqi constitution, President Bush even called Abul Aziz al-Hakim, the head of the Supreme Council for Islamic Revolution in Iraq, the Shia religious party, asking for concessions. In 2003 the US viewed SCIRI, not entirely wrongly, as a dangerous stalking horse for Iran, and US soldiers raided its Baghdad offices.

But the US has begun to learn too late. Iraqis know that whatever Bush and Blair say, the political will to stay in Iraq is weakening in the US and Britain. The British role in Iraq is in any case small, however great it may loom in domestic politics. The 8,500-strong force was never going to be enough to confront the Shia militias in southern Iraq.

The US was able to stick to its timetable for elections on 30 January and 15 December, as well as the constitutional referendum on 15 October. But this was primarily because it met the wishes of the Shia and Kurdish leaders. Even these "successes" had their price. The constitution was passed in the teeth of Sunni resistance, though the US tried to mitigate this with some last-minute cosmetic concessions. Under these the constitution can be amended by the newly elected National Assembly, although the Sunni parties are unlikely to have the votes to do so.

The constitution institutionalises the fragmentation of Iraq. The Kurds will have autonomy close to independence. They can drill for oil and will own what new reserves are discovered. But the surprise of the year is that the Shia leaders asked for and got the same concessions. There will be a Shia super region established, covering nine provinces in southern Iraq. This represents half of the 18 provinces in the whole country. One Iraqi minister lamented that the central government of Iraq might end up as a few buildings in the Green Zone

After the war in 2003, Arab Iraqis, both Sunni and Shia, would deride comparisons between Iraq and countries divided by sectarianism such as Northern Ireland and Lebanon. They pointed out that Sunni and Shia in Iraq were often married to each other. They did not have a history of massacring each other. These claims for Iraqi Arab solidarity were always a little exaggerated. Sunni friends claim to love the Shia, aside, of course, "from those that are really Iranians or their agents". The Shia, for their part, said they saw all Iraqi Sunni as their brothers "aside from those that are really Baathists". Claims of communal amity are made less often today. The divisions between them are deepening because Iraq was a Sunni state and is becoming a Shia one. The Sunni are fighting the US occupiers and the Shia are, for the moment at least, loosely allied to the US. Iraq's al-Qa'ida suicide bombers have repeatedly targeted Shia civilians such as day labourers waiting for jobs in the Khadamiyah district of Baghdad. Would-be army and police, almost always Shia, have been slaughtered again and again.

So far the Shia response has been restrained. Grand Ayatollah Ali al-Sistani, the supreme religious leader who is vastly influential over the Shia, has forbidden retaliation. But the powerful Ministry of the Interior, once controlled by the Sunni, is now in the hands of the Shia. The minister, Bayan Jabr, was previously a leader of SCIRI's militia, the Badr Brigade.

They dominate the fearsome paramilitary police commandos whom the Sunni see as nothing more than licensed death squads. At the end of the year, US troops raided an Interior Ministry bunker in the Jadriyah district of west Baghdad, where they found 158 tortured and starved prisoners, all allegedly Sunni. Bodies of men shot in the head and their hands in handcuffs are routinely found on dumps and beside the road in Baghdad.

Many ministries have become the domain of a single sect or party. The health ministry under the interim government became famous for being run by the Dawa Shia Muslim group, while the transport ministry portfolio is held by a follower of the nationalist cleric, Muqtada al- Sadr. This has a disastrous impact because the government begins to resemble that of Lebanon. Ministers are representatives of their communities. They cannot be fired, however crooked or incompetent.

The impact of the insurgency is exaggerated because the state in Iraq remains so weak. This remained strikingly true during 2005, when the government did extraordinarily little for its people. The electricity supply remains poor in Baghdad; kidnapping is rife; security is limited and Iraqis spend much of their time surviving from day to day. The police are not seen as protectors. Earlier this month, a student called Muammur Mohsin al-Obeidi said: "The Iraqi people know nobody is going to save them from criminals. They believe nobody will punish them. If gangsters are arrested they have enough money to bribe their way out of prison. There is no real government." It is a lament heard again and again from people in the streets of Baghdad. They believe government scarcely exists - and certainly not for their benefit.

There have been three administrations of Iraq since the US invasion, and all have failed. There was the Coalition Provisional Authority, fairly undiluted US imperial rule, under Paul Bremer, which helped provoke the Sunni rebellion. On 28 June 2004, the US formally turned power over to the interim government of Iyad Allawi, whose administration was notoriously corrupt. On 7 April 2005, Ibrahim al-Jaafari became Prime Minister but his government has proved fractious. These divisions largely mirrored those between the contending groups in Iraq. In all three administrations, corruption was on a scale attributed to states like Nigeria in the past. In 2005 the entire defence procurement budget of $1.3bn disappeared in return for a few unusable helicopters and armoured vehicles. This degree of corruption is now more difficult because ministers cannot spend money without authorisation.

There is a further reason why the Iraqi state is weak, which is not at first obvious. The US and Britain foresaw an Iraqi state whose armed forces were equipped only to cope with internal dissent. They have been determined not to hand over heavy weapons or modern equipment.

The US has not been as generous in transferring power to Iraqis as might appear from formal announcements. The main intelligence service has no budget, but is paid for and run by the CIA. The US has tried to keep control of the Defence Ministry and the new Iraqi army, which is supposedly being built up to take the place of US forces when they are withdrawn. The US military speaks of the triumphs and failures of training and equipping Iraqi troops (they have given less attention to the police). But there is another problem that the US has not really tackled.

The question is not just about the ability of the new army to fight, but about loyalty. Who, at the end of the day, will the soldiers fight for? Polls by Britain's Ministry of Defence show that the occupation is overwhelmingly unpopular among Shia as well as Sunni Iraqis. In the long run, the US cannot create an officer corps loyal to America. Then there is also the question of how far the army is a national institution. Its 115 battalions are reportedly 60 Shia, 45 Sunni, 9 Kurdish and one mixed. Over the next year we will see if Iraq is going to remain a single state or turn into a confederation. There are forces for unity as well as disintegration. Most Iraqi Arabs want to live in one country. But political observers fear that a Bosnian solution is on the cards, in which Baghdad will play the role of Sarajevo.