The move is aimed at proving the government's seriousness in cleansing Baghdad of sectarian violence.
The brigade was responsible for a region of northeast Baghdad where gunmen on Monday kidnapped 24 workers from a factory.
Hours later, the bodies of seven of the workers were found dumped in a district miles away.
Sunni officials blamed Shi'ite militiamen in the attack and accused the Shi'ite-led police of turning a blind eye to their operations.
The top US military spokesman in Iraq, Major General William Caldwell, said the brigade had been ordered to stand down and was undergoing re-training.
He said some were being investigated and that any found to have militia ties would be removed.
"There is clear evidence that there was some complicity in allowing death squad elements to move freely when, in fact, they were supposed to have been impeding their movement," Caldwell said.
The brigade had about 650-700 members, and the Iraqi Interior Ministry said that its commander of the unit, a lieutenant colonel, has been detained for investigation.
The major general who commands the battalion that includes the brigade has been suspended temporarily and ordered transferred.
Brigadier Abdul-Karim Khalaf, the chief ministry spokesman, said a random selection of troops in the suspended unit were being investigated for ties to militias.
Violence on the rise
The sectarian fighting between Shi'ites and Sunnis has become the deadliest violence in Iraq, with thousands slain in recent months.
A US military official claims the past week has seen the highest number of car bombs and roadside bombs in Baghdad this year.
Car bombs, as well as other explosions and shootings, killed 32 people across the country on Wednesday.
In the day's deadliest attack, two blasts and a car bomb hit a mainly Christian area of Baghdad, killing 12 people and wounding 56 others.
Hours later, after sunset and the end of the day's Ramadan fast, gunmen opened fire on a popular cafe in the city’s northeast.
Four patrons and seven others were wounded.
The US military announced the deaths of two soldiers in gunfire a day earlier in Baghdad and the northern city of Kirkuk.
A total of 17 Americans have been killed in combat since Saturday.
The violence has also threatened to undermine the government of Prime Minister Nouri al-Maliki as Shi'ite and Sunni parties in his coalition accuse each other of backing militias.
Shock at White House
The White House has expressed alarm after Iraqi authorities demobilized an entire police brigade over suspected links to sectarian death squads in the war-wracked country.
"It's obviously very disturbing and troubling," spokeswoman Dana Perino said.