Colin Powell said insurgents would attack an unelected government
The United States is to set Iraq's Governing Council a six month deadline to come up with a constitution that would lead to elections and a new government next year.
US Secretary of State Colin Powell told the New York Times the deadline would be difficult but it was necessary to get the interim Iraqi leadership moving.
The BBC's Ian Pannell in Washington says the move is a sharp about-face in American policy - and a concession to critics of the US-led occupation of Iraq.
The announcement comes as the US and members of the Iraqi Governing Council have raised concerns about the United Nations' decision to further reduce its international staff in Iraq because of continuing concerns about the worsening security situation.
The Iraqi minister responsible for foreign affairs, Hoshyar Zebari, said the UN was "playing into the hands of terrorists".
He told the BBC it was important for the UN to stay the course, despite two attacks on its headquarters in Baghdad.
The US has also expressed disappointment at the UN decision, taken at a time when the Bush administration is trying to encourage broader international support for the reconstruction of Iraq.
The UN Security Council is currently debating a new resolution that would encourage other nations to provide money and troops to the US-led occupation.
Some countries - including France - have called for a rapid timetable for Iraqi self-rule as a pre-condition for offering assistance, a move the US administration has ruled out.
Mr Powell told the New York Times that Washington had already asked the governing council to estimate how long it would take it to draw up a constitution which would lead to elections and a new government.
"If they take forever to give us the answer to that question, then we've got a problem," he said.
"But I think they'll give us an answer fairly quickly."
He said the constitution drafted by Iraqi leaders would
spell out whether Iraq should be governed by a presidential or
parliamentary system and clear the way for elections and the
installation of a new government in 2004.
Only then would the US transfer authority to Iraq itself.
Mr Powell added that granting authority to an unelected Iraqi Government would undermine its legitimacy in the eyes of the world and set it up for attack from Saddam Hussein loyalists.
Our correspondent says that US politicians in Congress have also been calling for a realistic timetable for the withdrawal of American troops.
US troops in Iraq come under regular attack and attacks on civilians continue to underline a precarious security situation in the country.
On Thursday a mortar attack on a market in Baqouba, north of Baghdad, left eight civilians dead and 18 injured.
The UN's decision to reduce its staff follows two bomb attacks on its offices in Baghdad within weeks of each other. The first, last month, killed 22 people, including the chief UN envoy, Sergio Vieira de Mello.
KEY UN AIMS IN IRAQ
Deliver humanitarian assistance
Help rebuild institutions to enable Iraqis to govern themselves
Aid safe return of refugees
Promote protection of human rights
Help rebuild justice system
Establish Iraqi media centre
Help Iraq rejoin international community
Other advice to Iraq Interim Authority
Some 600 international staff were stationed in Iraq before the first attack but that number has been drastically reduced.
In the absence of international staff, the UN will rely on more than 4,000 Iraqis to continue mainly humanitarian work.
"Today there remain 42 in Baghdad and 44 in the north of the country, and those numbers can be expected to shrink over the next few days," said Fred Eckhard, a spokesman for UN Secretary General Kofi Annan.
"This is not an evacuation, just a further downsizing, and the security situation in the country remains under constant review,"
That will soften the blow for Iraqi civilians who have come to rely even more heavily on the UN in the post war period, the BBC's Greg Barrow reports from the UN.
But UN officials acknowledge there is still likely to be a heavy political impact from this move.