(Reuters) — Cyber attacks and cyber espionage have supplanted terrorism as the top threats facing the United States in an annual "worldwide threat" assessment released on Tuesday by U.S. intelligence agencies.

"It's hard to overemphasize" the significance of threats in cyberspace, James Clapper, the director of National Intelligence, told the Senate Intelligence Committee.

However, in prepared testimony to the panel, Mr. Clapper played down the likelihood of catastrophic attacks on the United States by cyber attackers or foreign or domestic militants in the immediate future.

His remarks came amid rising alarm in Washington over digital attacks on corporate and government computer network, and the apparent difficulty the United States has defending against many of them.

On Monday, White House National Security Adviser Tom Donilon, citing complaints from U.S. businesses about alleged Chinese cyber espionage, said the issue has become a growing challenge to economic relations between the United States and China.

Last month, a private U.S. computer security company issued a study accusing a secretive Chinese military unit of being behind hacking attacks on a wide range of American industries.

On another topic, Mr. Clapper used Tuesday's hearing to give an alarming account of how U.S. intelligence capabilities will be damaged if Congress does not move to ease financial pressures caused by automatic across-the-board budget cuts known as sequestration.

Due to funding cutbacks, thousands of FBI employees could face furloughs, 5,000 intelligence contractors could be terminated, cyber security efforts could be affected and older overhead intelligence collection systems — spy satellites — could face cutbacks, he said.

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Intelligence agencies at a minimum want Congress to give them the authority to redistribute cuts among programs "to minimize the damage," he said.

In what has become an annual ritual, Mr. Clapper presented to the Senate panel a 34-page paper that ran through a wide variety of threats covered by U.S. intelligence agencies.

These included high-profile issues such as North Korea's belligerence and the proliferation of nuclear weapons, as well as regional and economic issues like continuing instability in the wake of the Arab Spring uprisings. Also covered was a potential transition in Cuba and what is predicted to be China's continuing domination of the world's supply of rare earth elements.

On two of the most volatile global crisis points, the U.S. spy agencies' assessment was restrained.

While Iran is improving its expertise in technologies, including uranium enrichment and ballistic missiles, which could be used in a nuclear weapons program, the intelligence community does not believe Iran's leadership has decided to build a nuclear weapon and does not know if or when it might do so.

This assessment is consistent with a controversial 2007 finding, known as a National Intelligence Estimate, which declared Tehran had "halted its nuclear weapons program" in fall 2003 and had not restarted it as of mid-2007, although it was keeping open the option of building nuclear weapons.

On Syria, U.S. spy agencies assessed that the erosion of the government of President Bashar al-Assad's ability to defend itself is accelerating.

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President Assad's forces have stopped insurgents from seizing cities such as Aleppo, Damascus and Homs, but the agencies say insurgents have been gaining strength in rural areas. This could ultimately lead to the establishment of a "more permanent base" for the rebels in Idlib province along the border with Turkey.

The listing of cyber-related attacks as the top item in the annual threat assessment is a departure from assessments offered in the previous two years. In 2011 and 2012, the first threat listed in the agencies' annual assessment to Congress was terrorism.

One factor that appeared to have boosted cyber attacks and cyber espionage to the top of the list is the worry that computer technology is evolving so quickly that it is hard for security experts to keep up.

"In some cases, the world is applying digital technologies faster than our ability to understand the security implications and mitigate potential risks," Mr. Clapper said.

Nonetheless, he said, U.S. agencies judge that there is only a remote chance over the next two years of a major cyber attack against critical infrastructure such as a regional power grid.

Less sophisticated attacks, such as denial-of-service attacks against bank websites, could be more likely, he said.

On terrorism, Mr. Clapper said that while "homegrown violent extremists" will continue to be recruited and motivated by inflammatory material on the Internet, U.S. agencies estimate that such militants will "continue to be involved in fewer than 10 domestic plots per year."

On Afghanistan, Mr. Clapper noted that the United States and other Western partners are proceeding with plans to pull troops out of the country, the Taliban insurgency "remains resilient and capable of challenging U.S. and international goals."