By Aseel Kami

BAGHDAD, Nov 12 (Reuters) - Nearly a million Iraqis still lack adequate food, although their number is down from 4 million in 2005, the United Nations World Food Programme said on Wednesday.

Iraq has managed to stave off a far bigger humanitarian crisis by using its oil wealth to fund a massive public food distribution system, the largest of its kind in the world, the WFP said.

Without state aid, a quarter of Iraq's 29 million people would "face real difficulties in ensuring their food security", it said in a report.

A survey across the country carried out by WFP and the Iraqi government found 930,000 now lack access to adequate food. A similar survey carried out in 2005 put the number at 4 million.

"We can give a cautious welcome to these figures," said Edward Kallon, WFP country director for Iraq.

"I say cautious because 930,000 is still far too many for a relatively wealthy country. Moreover there are a further 6.4 million people who would slide into food insecurity if it were not for safety nets such as the public distribution system."

The figures suggest that economic hardship declined for most of the poorest Iraqis even though the security situation in the country worsened dramatically in 2006-2007 when many Iraqis fled their homes.

Security has improved again over the past year. The World Food Programme is providing food for 750,000 displaced Iraqis.

The Iraqi government says it wants to wean the public off state handouts and replace a system of nearly-free food for everyone with a targeted welfare system to aid the poor.

The system, which provides Iraqis with monthly rations of staples like flour, cooking oil and baby milk, is "the largest public food programme operating in the world today", the WFP report said.

It said the system does not always function perfectly, with some people reporting items left out of their monthly rations.

Nearly all of the publicly distributed food is purchased abroad by Iraq's ministry of trade, using money earned from the export of oil.

Iraq's own agriculture has faltered. The report said the country is now experiencing one of the worst droughts of the last decade, with wheat and barley production for 2008-09 expected to fall by 51 percent from last year. (Writing by Peter Graff; Editing by Dominic Evans)

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