In comments to the press Wednesday, Allawi sounded the alarm over the security situation and political deadlock which he said "is even worse that a full-fledged civil war.
"I caution against letting the events reach a point of no return because that will be a drama and big catastrophe," he said, warning that "Iraq might soon enter a dark tunnel and an impasse."
He stressed that sectarian tensions, mainly pitting Sunnis against Shiites, and the lack of security and order constitute a phase of civil strife.
Allawi, who heads the secular Iraqi National Reconciliation Party, called on all Iraqi parties to acknowledge the existing dangers "instead of burying their heads in the sand and saying the situation is fine."
He called for the formation of a national salvation government as quickly as possible "as the only way out and means to save the country from the crisis it is reeling under."
Allawi's comments coincided with a worsening cabinet crisis and amid the lack of consensus over prime minister-designate Ibrahim Jaafari, who was rejected by both the Kurdish and Sunni blocs in parliament.
Jaafari, who is also the outgoing premier, was nominated by the Shiite Iraqi Coalition, the biggest bloc in parliament, which cannot yet agree on a substitute candidate if Jaafari agrees to give up the post.
In another development, the U.S. army said Wednesday five soldiers were killed in separate incidents in Iraq, as an explosion in Baghdad killed four Iraqis, including a policeman, and injured four others.
A U.S. army statement said four soldiers were killed in explosions north of Baghdad and a fifth died from wounds he suffered in an attack on Sunday near the town of Bild.