But serious security problems remained and the country had some of the world's worst rates of life expectancy, conditions for women and children, and literacy, the United Nations said.
Unless grievances such as a lack of jobs, health care, education and political participation were addressed, "the fragile nation could easily tumble back into chaos", the United Nations said in a statement accompanying the report.
If that happened, "Afghanistan will collapse into an insecure state, a threat to its own people as well as the international community", it said.
The report, prepared by the UN Development Programme with government participation, said the international backers of President Hamid Karzai's government needed to take a broad and long-term view of Afghanistan's development.
"The international community is committed to fighting terrorism and drugs inside Afghanistan, but human security cannot take a back seat to national and international security interests of other nations," said editor-in-chief Shahrbanou Tadjbakhsh.
Decades of conflict had taken a devastating toll, leaving Afghanistan near the bottom of the 177 countries covered in the UNDP's human development index, just above Burundi, Mali, Burkina Faso, Niger and Sierra Leone, it said.
Only 28.7 percent of Afghans over 15 could read and write and life expectancy at birth was just 44.5 years - at least 20 years lower than that in neighbouring states, and six years lower than the global average for least-developed countries.
Conditions for women and children were especially dire, with one in five children dying before the age of five and one woman dying of pregnancy-related illness every 30 minutes.
And while the economy had recovered significantly since the Taleban's overthrow, this had done little to address inequality.
One in two Afghans could be classified as poor and the poorest 30 percent received only nine percent of national income.
While millions more Afghans were back at school, the report said the education system remained the "worst in the word", with 80 percent of schools destroyed or damaged in the years of conflict.
Afghanistan needed multi-year commitments of international aid to fund long-term development, but that needed to be carefully directed to avoid dependency and disparities and Afghans needed to be better consulted over strategies.
"The overwhelming majority of people expressed their sense of pessimism and fear that reconstruction had bypassed the ordinary Afghan," the United Nations said of those consulted in preparing the report.
The United States was spending $1 billion a month to fight the war on terrorism, far less that was being spent to curb the poverty that can breed militancy, it said.