BAGHDAD, July 30 (Reuters) - Hunger and disease are spreading in Iraq as violence masks a deepening humanitarian crisis, British charity Oxfam said in a report on Monday.

The charity said 28 percent of Iraqi children are malnourished, 15 percent of Iraqis regularly cannot afford enough to eat and 70 percent lack clean drinking water, all sharp increases since 2003.

"The terrible violence in Iraq has masked the ongoing humanitarian crisis. Malnutrition amongst children has dramatically increased and basic services, ruined by years of war and sanctions, cannot meet the needs of the Iraqi people," Oxfam director Jeremy Hobbs said.

"The fighting and weak Iraqi institutions mean there are severe limits on what humanitarian work can be carried out. Nevertheless more can and should be done to help the Iraqi people," he said.

Two million Iraqis have been forced to flee the country since 2003, and at least as many have been displaced within Iraq.

Oxfam, which pulled out of Iraq along with most other aid agencies because of deteriorating security in 2003, said there are local charities within Iraq that are working to help the poorest Iraqis. But most are under-funded.

Some are afraid to accept aid from countries with troops in Iraq for security reasons, and Oxfam called on countries that have not sent troops to send more money for aid.

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