"The protracted crisis is breeding further instability ... it threatens people's livelihoods," the UN Mission said, urging "dialogue without preconditions" toward a stable government in the war-scarred nation.

Iraqis last voted on October 10, 2021 in an election triggered by an earlier wave of mass protests against endemic corruption, rampant unemployment and decaying infrastructure.

One year on, the country has yet to form a new government, leaving caretaker Prime Minister Mustafa al-Kadhemi in charge but unable to have parliament pass a new state budget.

The UN said that the vote a year ago "was a hard-earned election, brought about by public pressure from nationwide protests in which several hundreds of young Iraqis lost their lives and thousands were injured.

"Regretfully, this reaffirmation of democracy was followed by divisive politics, generating bitter public disillusion," it added in a statement.

Rival Shiite Muslim factions in parliament have been vying for influence and the right to select a new prime minister and government in a standoff that has seen both sides set up protest camps and at times sparked deadly street clashes.

"All actors must engage in dialogue without preconditions," the UN mission said.

"Through compromise, they must collectively agree on key outcomes... to service the needs of the Iraqi people and establish a fully empowered and effective government. The time to act is now."

The political impasse pits the powerful cleric Moqtada Sadr, who has demanded snap elections, against the Iran-backed Coordination Framework, which has been pushing to appoint a new head of government before any new polls are held.

Tensions last boiled over on August 29 when more than 30 Sadr supporters were killed in clashes with Iran-backed factions and the army in Baghdad's fortified Green Zone, the capital's government and diplomatic district.

Iraq has raked in huge revenues from energy exports this year, and the central bank is holding a colossal $87 billion in foreign exchange reserves.

However, the money remains locked up because Kadhemi is not authorised to submit an annual state budget to parliament in his capacity as caretaker.

The UN Mission said it is "imperative" that a budget is adopted before the end of the year.