Gordon Brown has announced that 1,000 British troops will be withdrawn from Iraq by Christmas.
The prime minister also said he believed that control of the Basra province would be handed over to full Iraqi control within the next two months.
He made the announcement during a visit to Baghdad on Tuesday, his first trip to Iraq since becoming prime minister.
"What we propose to do over these next few months is to move from a situation where we have a combat role to an overwatch role," he told reporters. "Hopefully they will be home by Christmas."
Brown was holding talks with senior Iraqi politicians from all sides, including prime minister Nouri Maliki.
He was also meeting the US commander in Iraq, General David Petraeus.
Following a one-hour meeting with Maliki, Brown said the three priorities for Iraq must be political reconciliation, economic reconstruction and that the security of the people and the armed forces in the country is properly guaranteed.
"The first thing on my mind today is the security of our armed forces," he said.
"I am very proud of what our armed forces are achieving here. I believe they have acted with great courage, professionalism and bravery."
"We will discharge our obligations to the Iraqi people and to the international community and we will discharge our obligations to our armed forces, who are doing this difficult job," he added.
Statement
Brown was set to make a Commons statement on Iraq early next week, but the announcement now will significantly increase speculation that he is paving the way for a general election this year.
Brown's spokesman defended announcing troop withdrawals to the media before his statement to the Commons.
"The prime minister will be making a full statement to Parliament at the beginning of next week," she told reporters.
"Following the meeting with the Iraqi prime minister at which this issue was discussed it was appropriate that information would be given.
"However the statement at the beginning of next week will be a full statement with full detail and looking at the broader picture more generally."
Troop levels currently stand at around 5,500 in total and could be cut by a further 1,000 early next year, according to reports.
Since he took power in June, Brown has been preparing to announce that British troops will be able to hand over control of the Basra region to Iraq this autumn. Basra is the last of four provinces still under UK control.
However he is thought to have had to shelve plans to move remaining troops from Basra airport to American or Australian bases or even to neighbouring Kuwait.
Timetable
Conservative leader David Cameron said: "If it is now possible to hand over progressively to the Iraqi army and to bring more of our troops home then he will certainly have my support.
"I have always taken the view that you have to put the national interest first on this issue.
"I have never called for precipitate withdrawals or calling for a timetable - we have to do what is right. If the prime minister does what is right he will have my support."
Liberal Democrat leader Sir Menzies Campbell said: "While we welcome any reduction in the number of British troops in Iraq, there is now an urgent need to get all the 5,000 remaining troops home.
"The overriding question is whether there is any military or political benefit to be gained from the continued presence of our armed forces in Iraq. The answer is clearly no.
"The government should draw up a timetable to get all our soldiers safely home within six months."
