The announcement came, however, as six Sudanese including a diplomat were reported kidnapped in the strife torn country.
Mr Rumsfeld's announcement means the number of US troops will drop back under the level of 138,000 for the first time since April 2004.
The Commander of US forces in Iraq, General George Casey, said that President George W. Bush and Mr Rumsfeld had accepted his recommendation not to deploy two brigades scheduled for deployment next year.
However the defence secretary foreshadowed that troop levels would vary as their mission changed and could even still rise.
"The size and composition of US forces will continue to fluctuate as commanders continue to shift focus from combat to supporting and training the Iraqi security forces.”
"This will include increases in the number of US forces involved in transition teams, intelligence support and logistics, to assist the Iraqi security forces in continuing to assume increasing responsibility for the security of the country," he said.
British Prime Minister Tony Blair also used a Christmas visit to Iraq to raise the prospect of starting a British troop reduction next year, while the Lithuanian government has announced the withdrawal of half of its 100-man force from the country.
While in Iraq Mr Rumsfeld, who arrived in the country from Afghanistan, also held talks with Iraqi President Jalal Talabani and Prime Minister Ibrahim Jaafari, after a brief side trip to neighbouring Jordan to inspect a training facility for Iraqi security forces.
Kidnapping
Meanwhile in Iraq a Sudanese foreign ministry spokesman, Jamal Mohammad Ibrahim, told Al-Jazeera television that he did not know who had kidnapped six Sudanese nationals, including embassy second secretary Abdel Monam al-Dur and four local staffers, and appealed for their immediate release.
He said the men were seized as they returned to the embassy after Friday prayers.
Other violence
In other violence a suicide bomber riding a bicycle blew himself up next to a Shiite mosque killing 10 worshippers in the town of Baladruz.
The attack was the bloodiest since the December 15 general elections.
Not far away, insurgents attacked an army checkpoint in Odhaim, north of Baghdad, with rocket-propelled grenades and automatic weapons, killing eight soldiers and wounding 17, police said.
In Baghdad, four soldiers were killed by roadside bombs, two on Friday and two on Thursday, bringing the toll of US military killed since the invasion to 2,163.