The State Department's annual report on international drug trafficking is likely to spark controversy in Congress over its praise for Mexico, which ranks as the single largest source for heroin entering the United States.

In a letter accompanying the report, Secretary of State James A. Baker III acknowledged on Wednesday that the worldwide battle against narcotics "is clearly not being won" and might even be "slipping backwards."The report serves as President Bush's annual update for Congress on global drug trafficking.

In contrast to last year's report, which said corruption in the Mexican government was "endemic," this year's lauded U.S.-Mexican cooperation and points to increased drug seizures and arrests. It also takes note of a new agreement on fighting drug trafficking.

Last year, the Senate voted 63-27 to punish Mexico for its lack of cooperation in the battle against drugs, but the attempt was killed in the House. This year, Congress has 45 days to decide whether it agrees with the president's findings.

The report lists 17 countries or territories as major narcotics producers or transit points, yet finds that their governments may receive U.S. assistance to continue the effort against illicit drugs.

Bush recommended that Burma and Laos be added to the list of nations ineligible for U.S. aid because of their support for drug trafficking, but the two nations don't receive any U.S. aid anyway.

Nor do the other nations on the list - Afghanistan, Iran, Syria and Panama - but the action does permit the government to impose tariffs or tighten customs rules against certain imports.

Some of the report's most striking language came in the dim view taken by Baker on the international drug fight.

"Both here and abroad, the international war on narcotics is clearly not being won. In fact, in some areas, we appear to be slipping backwards," Baker said.