Members of Israel's Mossad secret service are among the agents working in Iraq, where some pose as businessmen, but in reality are training Kurdish commandos in the northern part of the country, the report said.
Israel's embassy in Washington denied the claim, but the magazine said a senior official at the Central Intelligence Agency confirmed that Israelis are working in Iraq.
Israel's government decided six months ago that the United States would not succeed in bringing stability and democracy to Iraq, and believes it needs agents in the country, The New Yorker said.
In working with Kurds, Israel has its eyes and ears on Iran, Iraq and Syria, the magazine said. After a June 30 handover to an interim Iraqi government, Israel wants to have Kurdish commandos trained as a counterbalance to Shiite militias, it said.
Israeli agents and Kurdish commandos have already crossed Iraq's border into Iran, where they have set up sensors and other devices to monitor Iranian nuclear facilities.
A former CIA officer also told the magazine that Iraqi prime minister Iyad Allawi had worked as an agent for Saddam Hussein's Baath Party in the 1960s and 1970s, and has links to the killings of Iraqi dissidents across Europe.