Nov. 8 issue - Sgt. Jonathan Scarfe, a broad-shouldered U.S. Marine with a square jaw and a 5 o'clock shadow, is trudging through a small town near Fallujah. On the opposite side of the street, taking his cues from Scarfe's movements, is Hussein Ali Jassim, who commands a small unit of the new Iraqi Special Forces. Scarfe says he trusts Jassim implicitly—which is more than he can say for most Iraqi National Guardsmen, less-trained locals thought to be collaborating with the insurgents. "The ING guys usually slept outside during the summer," says Scarfe. "When they slept inside, you knew a mortar barrage was coming." At one intersection, children laugh and shout as Jassim, who sports a small, well-trimmed mustache, distributes candy. But a young Iraqi across the street smirks and makes an obscene gesture. "These people," says Scarfe, "will let us walk right to our death."

Now the Marines and their Iraqi protegés are gearing up for the biggest offensive in Iraq since April. Barring an unexpected breakthrough in talks with local leaders, a long-awaited attack on the insurgent strongholds of Fallujah and neighboring Ramadi may come as early as this week, shortly after the American presidential election. Fighting is expected to continue at least until December, U.S. officials say. In recent weeks American military trainers have been frantically trying to assemble sufficient Iraqi troops to assist in the assault. And they are praying that the soldiers perform better than last April, when two battalions of poorly trained Iraqi Army soldiers refused to fight. The insurgents struck first last week. On Saturday, a convoy of Marines was moving into position around Fallujah when a suicide bomber drove into them. The explosion killed eight, bringing the war's total to nearly 1,120 American dead.

And so the bloody battles of the Iraq war—which never quite ended—are about to start up again in full force. Much depends on the new offensive. If it succeeds, it could mark a turning point toward Iraqi security and stability. If it fails, then the American president will find himself in a deepening quagmire on Inauguration Day. The Fallujah offensive "is going to be extremely significant," says one U.S. official involved in the planning. "It's an attempt to tighten the circle around the most problematic areas and isolate these insurgents." But it will also be "the first major test" of the new Iraqi security forces since the debacle in April, says Michael Eisenstadt, an Iraq expert at the Washington Institute. Their performance, he says, will "provide a key early indicator of the long-term prospects for U.S. success in Iraq."

For months the American people have heard, from one side, promises to "stay the course" in Iraq (George W. Bush); and from the other side, equally vague plans for gradual withdrawal (John Kerry). Both plans depend heavily on building significant Iraqi forces to take over security.

But the truth is, neither party is fully reckoning with the reality of Iraq—which is that the insurgents, by most accounts, are winning. Even Secretary of State Colin Powell, a former general who stays in touch with the Joint Chiefs, has acknowledged this privately to friends in recent weeks, NEWSWEEK has learned. The insurgents have effectively created a reign of terror throughout the country, killing thousands, driving Iraqi elites and technocrats into exile and scaring foreigners out.

"Things are getting really bad," a senior Iraqi official in interim Prime Minister Ayad Allawi's government told NEWSWEEK last week. "The initiative is in [the insurgents'] hands right now. This approach of being lenient and accommodating has really backfired. They see this as weakness."

A year ago the insurgents were relegated to sabotaging power and gas lines hundreds of miles outside Baghdad. Today they are moving into once safe neighborhoods in the heart of the capital, choking off what remains of "normal" Iraqi society like a creeping jungle. And they are increasingly brazen. At one point in Ramadi last week, while U.S. soldiers were negotiating with the mayor (who declared himself governor after the appointed governor fled), two insurgents rode by shooting AK-47s—from bicycles. Now even Baghdad's Green Zone, the four-square-mile U.S. compound cordoned off by blast walls and barbed wire, is under nearly daily assault by gunmen, mortars and even suicide bombers.

Everyone is vulnerable. One evening two weeks ago a group of employees was leaving by bus from the Iraq Hunting Club, a green-lawned retreat once occupied by Ahmad Chalabi, the Pentagon's former favorite exile leader. Only one man survived to tell what happened: gunmen in a passing car fired on the bus, forcing it off the road. The attackers took a heavy machine gun out of the trunk and shot up the bus some more. Then they approached with Kalashnikovs and casually finished off the wounded. The sole witness lived only because he was under a corpse. A similar massacre on Oct. 20 along the highway to Baghdad airport, again on a mini-bus, killed six women and one man, Iraqi Airways employees on their way to work. The same day, ambushers murdered two women secretaries and a male official who worked in the office of Iraqi interim President Ghazi al-Yawar.