Gen McChrystal said US and Nato allies were barely over half-way towards reaching their goals in the country.
"Operation Enduring Freedom" was aimed at tracking down Osama Bin Laden after 9/11 and eliminating the Taliban.
The UN says more than 10,000 Afghan civilians have died because of the fighting in the past five years alone.
More than 2,500 international troops have been killed - most of them American.
The conflict has already surpassed Vietnam to become the longest war in US history.
'Superficial understanding' Speaking at the Council on Foreign Relations, Gen McChrystal, who commanded coalition forces in 2009-10 before being forced to resign after a magazine interview, said the most difficult task would be to create a legitimate government that ordinary Afghans could believe in and that would balance the influence of the Taliban.
"We didn't know enough and we still don't know enough," he said. "Most of us - me included - had a very superficial understanding of the situation and history, and we had a frighteningly simplistic view of recent history, the last 50 years," he said.
He added that while the choice to engage in Afghanistan may have been understood, the decision to invade Iraq had been seen as illegitimate by many in the Muslim world and had diverted some military resources that could have been put to good use in Afghanistan.Gen McChrystal's comments come as a coalition of aid groups said despite billions of dollars in aid, improvements were only patchy.
The Acbar group said health and education sectors in particular remained in dire need of improvement.
Few gains
The BBC's Paul Wood, in Kabul, says that Western officials admit that parts of the country will remain violent after 2014 when Nato relinquishes its combat role. Without a peace deal with the Taliban, he says, few really expect the war to be brought to an end.
Some $57bn (£37bn) of aid has been spent over the past decade, according to the non-governmental organisations who form part of the Agency Co-ordinating Body for Afghan Relief, but, while some gains have been made, the spending has not always translated into real improvements for many Afghans.
For example, now 80% of Afghans have access to health services, compared to just nine percent in 2001, according to data from the Public Health Ministry.
But many of the brand new clinics are often closed or poorly equipped.
"Behind the headline numbers there lies a picture of people struggling to reach clinics which lack medicines or doctors, and school children trying to learn without textbooks or classrooms," said Acbar director Anne Garella.
The country is also facing its worst drought for a decade, with the World Food Programme saying it expects that 2.6 million people will need aid.
Rights group Amnesty International earlier this weeks welcomed progress in new human rights laws, the availability of education and health services and reduced discrimination against women, but said in some spheres - including justice and policing, security and displacement - the situation had remained stagnant, or even deteriorated.
"The Afghan government and its partners can't continue to justify their poor performance by saying that things are better than during the 1990s," said Sam Zarifi, Amnesty's Asia Pacific director.
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