British defence secretary John Reid told the House of Commons that there are now many more Iraqi forces ready to carry out duties performed until now by British troops.
He said there are about 235,000 members of the Iraqi security forces now trained and equipped with 5,000 more signing up each month.
British forces will still control operations for both their own troops and Iraqis for the time being, he said.
"But let me stress that the significant reductions I have announced are not part of the handover of security responsibilities to the Iraqis themselves...," he said.
A Joint Committee to Transfer Security Responsibility, involving coalition partners and Iraqis, will meet in the coming weeks to discuss whether conditions were right for some provinces to begin a full handover.
Ten percent of forces
The announcement marks a reduction of about 10 percent in British strength in Iraq. The country's troops are mainly based in Iraq's four southern provinces.
The date for a full pull-out of all US-led coalition troops from Iraq has been the source of much media speculation in Britain.
British Lieutenant General Nick Houghton told The Daily Telegraph earlier this month that Britain will withdraw most of its troops from Iraq by the middle of 2008 under a phased withdrawal that could begin within months.
Mr Reid played down fears of civil war and said that although violence had surged in some areas, particularly after the bomb attack on the Shia mosque in Samarra, north of Baghdad, there were pleas for calm from the leaders of Iraq's rival communities.
"Our analysis is that civil war is neither imminent nor inevitable," he added, after some commentators expressed concern that the violence could escalate into all-out conflict between Iraqi opposition groups.
He also reiterated his stance on Britain's presence in Iraq, stating: "We will stay as long as we are needed and wanted and until the job is done. Today marks another significant step in that direction."
Committed to Iraq
Britain continued to be "steadfastly" committed to Iraq and the coalition, he added.
Reaction to the announcement was mixed with Christopher Langton, from the London-based International Institute for Strategic Studies, saying that remaining forces were unlikely to be overstretched.
Troops were likely to be withdrawn from "softer areas" with fewer violent attacks, the former British army colonel added.
Anti-war campaigners said it was not enough and demanded a full pull out.
The smaller opposition Liberal Democrats, which was opposed to military action, called for a clear exit strategy, while the main opposition Conservatives asked if the draw down was connected to Afghanistan.
About 4,600 extra British troops are to be sent to Afghanistan, including 3,300 to help with reconstruction and counter-narcotics in the lawless southern Helmand province.
About 1,100 British troops are already in Afghanistan but Mr Reid stressed that the Iraq pullout was not connected with Afghanistan.