Head of the State Department Office to Combat Trafficking in Persons John Miller said trafficking in human beings and forced labor are a form of "modern slavery," admitting the United States witnesses many of these crimes on its own soil each year.
Iran, Syria, Saudi Arabia, Laos and North Korea were singled out as countries with horrendous records of human trafficking.
Israel appears on a list of countries being monitored for improving signs in fighting human trafficking and forced labor.
The report said Israel is a destination for workers from Romania, Jordan, Turkey, Thailand, the Philippines, Nepal, Sri Lanka and India, who provide the workforce for the construction and agricultural sectors.
Many of these workers pay human traffickers USD 1,000-10,000 before reaching Israel, which makes them vulnerable to employers as they are eager to earn the money back.
The report also said Israel is a destination for sex workers from former Soviet Union countries.
Between 1,000 and 3,000 foreign women work as prostitutes and as many as 20,000 foreigners are subjected to forced labor in Israel, the report said, citing independent groups.
The State Department praised the government for making a "considerable effort" to fight human trafficking, but said is not obeying international standards.
The report specifically criticized Israeli labor laws under which foreign workers can only seek employment with an employer whose name appears on their work permit. Under the current law, should an employer fire foreign employees they are automatically rendered illegal aliens and subject to deportation.
The government was praised however for a campaign against women traffickers. Some 31 traffickers were convicted and sentenced last year.