Iyad Allawi, who won the most votes in Iraq's elections, threatened to quit a power-sharing government in an interview with Britain's Times
newspaper on Tuesday.
"Power-sharing is not happening," Allawi said. "It is not set to work in a meaningful way... If it does not change, I will not participate."
Despite being lauded by international leaders including US President Barack Obama, Iraq's power-sharing pact has looked fragile ever since it was agreed last month after an eight-month impasse.
Despite his Al-Iraqiya block narrowly winning elections in March, Allawi has seen religious parties coalesce to form the biggest grouping in the new parliament led by Prime Minister-designate Nouri Al-Maliki.
Allawi, a Shia Muslim, claimed that Iraq's political system meant a non-sectarian politician could never succeed. He laid the blame at the feet of Iraq’s Shia neighbour, Iran, and said Iranian leaders had a "red line" against him.
"There is a question mark on democracy now," he said. "People realise that Iran has the upper hand and they feel Iraq is controlled by foreign forces."
He added: "Iran has obstructed the way to power-sharing. They have a red line against me personally and they do not want Iraqiya to participate in the new government."
Allawi said Iraqis were likely to quickly become disillusioned with any government that is formed.
"There is a lot of disillusionment among Iraqis, whether they voted for us or not," Allawi said. "They associated democracy with the fact that whoever got the highest numbers should spearhead the formation of the government."
The Times said Allawi had also confirmed that many imprisoned members of the Al-Mahdi Army, followers of fiery Shia cleric Moqtada Al-Sadr, had been released as part of a deal struck between Maliki and Sadr two months ago.
The move is considered likely to have been engineered by Iran.
Asked how Iraq's political landscape would look in a year's time, Allawi told the paper: "Really, I don't know."