His Iraqi counterpart, Nuri al-Maliki, whose government officially took office on Saturday after months of tough negotiations, voiced hope that local forces would be able to take over security matters from US-led forces across much of the country by the end of the year.
But the scale of the task ahead was underscored by unrest in which more than 20 Iraqis were killed in a string of bombings and shooting attacks in Baghdad and other trouble-spots.
Mr Blair said Britain, the main ally in the US-led invasion of March 2003, would work with the new government "to make the hopes and expectations of the Iraqi people for the future a reality".
"Iraqi people are about to take charge of their own destiny and write the next chapter of Iraq history themselves," said Mr Blair, on his fifth visit to Iraq since the invasion and the toppling of
Saddam Hussein in April 2003.
He said peace in Iraq, which is battling a largely Sunni-led insurgency as well as sectarian violence, would pave the way for the withdrawal of foreign forces, which include about 8,000 British troops.
"It's the violence that keeps us here. It's the peace that will let us go," Mr Blair added.
In a similar vein, US President George W Bush said the new government represented a major "victory" for democracy and would also allow the US military to assume more of a support role.
"As the new Iraqi government grows in confidence and capability, America will play an increasingly supporting role," he said in a speech in Chicago.
The British prime minister also met Iraq's president, Jalal Talabani who thanked Mr Blair and the British military for overthrowing former dictator Saddam Hussein.
"We are working hard to ensure our own security so we can gratefully say farewell to your forces," he said.
The US administration is also under increased pressure from the American public to withdraw the 134,000 US troops deployed in Iraq.
The US military on Monday announced the death of a marine in the city of Fallujah in the restive western province of Al-Anbar, bringing the number of American military personnel killed since the invasion to 2,456.
A senior British official travelling with Mr Blair said the withdrawal of US-led forces should be accomplished within four years, with a transfer to civilian control in several provinces during the summer.
"There is an agreement for the transfer of security under a timetable which starts in June when Iraqi forces will take control of the provinces of Samawa and Amara," Mr Maliki said at the press conference.
Mr Maliki insisted the country was "not in a civil war", but reiterated his intention to disarm militias blamed for a recent surge in sectarian violence.