The militia is weakened after many battles with US and Iraqi forces
Iraqi Shia cleric Moqtada Sadr has announced the creation of a cultural wing of his organisation, known for its Mehdi Army militia.
In a statement read at Friday prayers, he said only a "resistance" group was to remain armed, AP reported.
A spokesman told Western media Mr Sadr's militias would disarm if the US set and followed a timetable for withdrawing its troops from Iraq.
The US and Iraq are negotiating the terms of a future US troop presence.
Mr Sadr's spokesman, Salah al-Obeidi, told Reuters news agency the decision "should not be considered an end to the Mehdi army" but was "a halfway step to dissolving the Mehdi Army".
The announcement follows comments to the same effect earlier this week.
It comes as Iraq and the US are discussing a status of forces agreement that will govern the US troop presence in the country when a United Nations mandate expires at the end of the year.
"We want to see whether the provisions of the agreement are serious. We will be satisfied if the agreement contains the withdrawal of US forces," Mr Obeidi told French news agency AFP.
"If so, we will complete the reorganisation of the Mehdi Army which aims to transform it into a social organisation," he said.
The BBC's Crispin Thorold in Baghdad says the Mehdi Army was once arguably the most powerful Shia military and political movement in Iraq, but it has been seriously weakened after military operations against it.
Local ceasefires were declared in Basra and Baghdad earlier this year after intense fighting, but the militia retained its weapons.