The US has warned that opium production in Afghanistan reaching record levels, undermining efforts to legitimise the economy and supplying the Taliban with funds for weapons.

The US state department release its report on the issue as Jaap de Hoop Scheffer, Nato's secretary-general, met George Bush in Washington to discuss Afghanistan.

"Narcotics production in Afghanistan hit historic highs in 2007 for the second straight year," said the report, released on Friday.

"[The country's] drug trade is undercutting efforts to establish a stable democracy with a licit economic free market in the country."

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Last year more than 93 per cent of the world's opium came from Afghanistan, the report said, while more than 14 per cent of Afghans were involved in poppy production in 2007, up from 12.6 per cent in 2006.

The report said 2007's crop had an export value of about four billion dollars, more than one-third of Afghanistan's gross domestic product (GDP).

"The Afghan government must take decisive action against poppy cultivation soon to turn back the drug threat before its further growth and consolidation make it even more difficult to defeat," the annual report added.

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