Junior defence minister Derek Twigg downplayed any sense of crisis after the National Audit Office report said the military currently has a shortfall of 5,000 people.
The audit report noted that many troops have quit the services earlier than anticipated, while some potential recruits are put off by the Iraq and Afghan conflicts.
The minister said that, on the contrary, some young people were drawn to the military because of the conflicts. "While it is clear some people are unhappy with operations, quite a number want to join because of the operations. They are doing a tremendous job," he told GMTV morning television.
"Some of the Marines left because they could not go on operations ... There has been an upsurge in interest from people who want to join the armed forces," he added.
"We are stretched but not over-stretched."
Britain has around 7,000 troops in Iraq and around 5,000 in a 31,000-strong NATO force in Afghanistan, where British troops are on the frontline of increasingly deadly attacks by Taliban insurgents in the south.
The National Audit Office, which oversees how the government spends taxpayers' money, said the army, navy and air force were currently 5,170 under strength -- a shortfall of 2.8 percent.
Its report added that, in the 30 months leading up to January 2006, 14.5 percent of army personnel were sent on operations more often than guidelines say they should be.
The number of troops quitting early has also gone up, with 9,200 leaving last year before the end of their period of engagement, a situation linked to stress on families and too many deployments, the report said.
Recruitment has been hit by controversy over the Iraq war, it added.
Liam Fox, defence spokesman for the main opposition Conservatives, said the government must give the forces more cash if it is to continue current levels of deployment.
And Nick Harvey, defence spokesman for the second largest opposition party the Liberal Democrats, added: "The government must demonstrate how it expects our troops to cope with the serious challenges ahead in Iraq and Afghanistan."
Despite the government assertions, a former senior general insisted Britain's armed forces are taking on too much.
"Of course they are over-stretched. I know people going back on operations within six months of returning," former UN commander in Bosnia Colonel Bob Stewart told GMTV.
"What we need is lance corporals, corporals, sergeants and younger officers such as captains staying in because those are the people who have got the experience and they're tending to leave."
The audit report also said that two thirds of British 16-year-olds were considered too fat to join the army.
Earlier this year, the Ministry of Defence said it was relaxing its Body Mass Index criteria for male recruits aged between 28 and 32.

Copyright AFP (Agence France-Presse), 2006