The Afghan government angrily denied the US director of national intelligence's assessment yesterday, insisting it controlled "over 360" of the country's 365 districts. "This is far from the facts and we completely deny it," said the defence ministry.

But the gloomy comments echoed even more strongly worded recent reports by thinktanks, including one headed by the former Nato commander General James Jones, which concluded that "urgent changes" were required now to "prevent Afghanistan becoming a failed state".

Although Nato forces have killed thousands of insurgents, including several commanders, an unrelenting drip of violence has eroded Karzai's grip in the provinces, providing fuel to critics who deride him as "the mayor of Kabul".

A suicide bomb at a dog fight near Kandahar last week killed more than 80 people. Yesterday fighting erupted in neighbouring Helmand when the Taliban ambushed a police patrol. The interior ministry said 25 militants were killed; a Taliban spokesman said they lost one.

A day earlier, the Asian Rural Life Development Foundation aid agency said it feared that Cyd Mizell, an American employee kidnapped in Kandahar last month, had been killed in captivity.

A big injection of foreign troops has failed to bring stability. The US has almost 50,000 soldiers in Afghanistan and - twice as many as in 2004 - while the UK has 7,700, mostly in Helmand. Another 2,200 US marines are due to arrive next month to combat an expected Taliban surge.

Nato commanders paint the suicide bombs and ambushes as signs of a disheartened enemy. Yesterday, Brigadier Andrew Mackay, commander of the British contingent in southern Afghanistan, said the Taliban were "worn down", running low on fighters, and being ostracised by local communities. "Logistically they are also challenged. The cumulative effect of all of this is that they are having to change their modus operandi, and that is why we are seeing more asymmetric attacks and suicide bombings in places such as Kandahar," he said.

But analysts believe the Taliban is successfully adapting the brutal guerrilla tactics that have served Iraqi insurgents so well. The six British soldiers killed in Helmand over the past three months were victims of roadside bombs. The drugs trade is swelling the Taliban coffers - according to the highest estimates, 40% of profits, or tens of millions of pounds, go to the insurgency. Attacks have made the main road from Kandahar to Kabul too dangerous for foreigners. Afghan truck drivers travel with armed escort.

The insecurity has penetrated the capital. Since an assault on Kabul's Serena Hotel last January, westerners have disappeared from the streets of Kabul. This week Taliban commanders threatened to step up the campaign with more bombs.

The key to the Taliban's success, McConnell said, "is the opportunity for safe haven in Pakistan". Meanwhile the surge in violence has placed a big strain on Nato. The French president, Nicolas Sarkozy, has agreed to deploy a battalion near Kabul after America has criticised European states for refusing to join the fight in the south.

Canada has threatened to withdraw its troops from Kandahar next year if reinforcements do not arrive. It is currently being debated in the Canadian Parliament on how long Canada will remain.

As Oxfam report yesterday said international and national security forces, as well as warlords, criminals and the Taliban, were perceived by ordinary Afghans as posing security threats.