Three-quarters of al-Qaeda in Iraq has been destroyed over the last year, the Interior Ministry in Baghdad has said.
Security improvements coincide with the US troop surge
Iraqi and American commanders said the improvement in security in the country over 2007 had been remarkable.
But top US commander Gen David Petraeus warned al-Qaeda remained the greatest threat facing the country and security gains could easily reverse.
It came as a tape purportedly by Osama Bin Laden urged Iraqis to reject the US aim of a national unity government.
"Our duty is to foil these dangerous schemes, which try to prevent the establishment of an Islamic state in Iraq," the internet audiotape said.
The recording in the name of the al-Qaeda leader also warned Sunnis in Iraq not to join the US-allied tribal councils fighting his organisation.
'On the run'
Iraqi interior ministry spokesman Maj Gen Abdul Kareem Khalaf said the disruption of the al-Qaeda network was due to the weeding out of security force personnel with ties to militias.
He said: "[Al-Qaeda] activity is now limited to certain places north of Baghdad. We're working on pursuing those groups, that is the coming fight."
His claim that 75% of the group's hideouts in Iraq had been eliminated could not be independently verified. He also said assassination attempts were down 79% since June.
The fall in violence over the year coincides with the surge in US troop numbers authorised by President George W Bush.
The BBC's Jo Floto in Baghdad says there are a number of other factors behind the security gains, such as a six-month ceasefire announced in August by the Mehdi Army militia of Shia cleric Moqtada Sadr.
But perhaps most crucial, says our correspondent, has been the emergence of Sunni militias who once fought the Americans and the Iraqi government but are now fighting al-Qaeda.
In his year-end review for media, Gen Petraeus said US figures showed the number of overall attacks had fallen by 60% since June.
But his figures also showed a slight rise in suicide car and vest bombs since October, highlighting the fragility of security.
He said tougher action by a number of Arab nations had helped reduce the inflow of foreign funds and fighters into Iraq.
'Less Iranian weapons'
Concerted action by the authorities in Damascus had halved the flow of insurgents through neighbouring Syria, he said.
According to Gen Petraeus, attacks using Iranian-supplied weapons had also fallen in recent months.
But he nevertheless called on Iran to respect a pledge to "stop the training, funding and arming of the so-called special groups".
Analysts said this was a reference to Shia militias that have splintered away from organisations such as the Mehdi Army.
Gen Petraeus said intelligence indicated that funding from abroad for al-Qaeda had fallen.
"Some of what we are told is that they are really struggling to buy gas for the vehicles," he said.
"You are seeing a much more survival level of conversation [among al-Qaeda in Iraq operatives]."