By Maggie Fox, Health and Science Editor

WASHINGTON, Nov 29 (Reuters) - Most governments are working quickly to attack avian flu when it pops up among birds but the virus is now entrenched in at least three countries, the United Nations and World Bank reported on Thursday.

And domestic animals can act as a "time bomb," providing a place for the virus to hide and change, potentially into a pandemic strain, the U.N."e;s top bird flu official said.

The H5N1 avian influenza virus has now been reported in 60 countries since 2003, according to the report. It has killed 206 out of 335 people infected and could mutate into a form at any time that would easily spread from person to person, killing tens of millions.

But the report says most countries had taken the threat seriously and were building up the infrastructure needed to fight outbreaks.

"The efforts of thousands of good men and women are starting to pay off," U.N. bird flu coordinator Dr. David Nabarro told Reuters in a telephone interview.

Nabarro said much more needs to be done.

"Highly pathogenic avian influenza is currently entrenched in Indonesia, Egypt and Nigeria, and possibly in some locations in China and Bangladesh," the report reads.

"Once the virus is entrenched, control and elimination become a major challenge, and the risk of human infection with H5N1 increases."

One big problem is veterinary services in poor countries, some of which lack the facilities to even test for bird flu.

"Controlling disease in animals lies at the root of preventing human infections and reducing the probability of a pandemic," the report reads.

"Livestock and farm animals are a kind of time bomb in our midst," Nabarro said. "We must rear our animals in a healthy way."

"e;SUB-STANDARD"e; ANIMAL HEALTH SERVICES

In countries where bird flu has spread to people, poultry are often raised in backyard flocks and people come into close physical contact with infected birds.

The report is based on surveys of 146 countries, 95 percent of which said they had a bird flu plan.

"The results presented in the report indicate that substantial progress has been made in the initial "e;emergency"e; phase of the global response to highly pathogenic avian influenza and threats to public health," the report reads.

"Outbreaks are being detected more rapidly and the response is more effective. However, animal health services are still sub-standard in most countries -- they lack necessary regulatory frameworks, budgets, laboratory capacity and implementation of bio-security measures," it adds.

And countries, especially in Africa, lack the capacity to diagnose bird flu in people.

Those countries that have taken immediate action now need to move to longer-term strategies "with an increased focus on bio-security in both family and commercial poultry production systems," the report recommends.

And countries must share virus samples, it said. The United Nations and Indonesia have been arguing over how to share viruses taken from birds and people with researchers trying to formulate vaccines against the disease. (Editing by Will Dunham and Xavier Briand)