The UK will hand over control of Basra to Iraqi forces despite failing in its goal to establish security there, an MPs' report says.
UK troops numbers in Iraq will be cut to 2,500 by next spring
The city is dominated by militias and the police contains "murderous" and "corrupt" elements, the report added.
The whole purpose of the UK forces' presence may be in question due to cuts, the Defence Committee suggested.
Defence secretary Des Browne said security forces in Basra had grown in ability during the past year.
Numbers at the Basra Air Station base are to be halved to 2,500.
The report said: "The initial goal of UK forces in south eastern Iraq was to establish the security necessary for the development of representative political institutions and for economic reconstruction.
"Although progress has been made, this goal remains unfulfilled."
It also suggested that the relative security of Basra did not mean that the root causes of violence had been tackled.
The report added: "There remain murderous, corrupt and militia-infiltrated elements within the police which must be rooted out as a matter of priority."
It went on to speculate on the future role of UK forces in Iraq.
The report said: "If there is still a role for UK forces in Iraq, those forces must be capable of doing more than just protecting themselves at Basra Air Station.
"If the reduction in numbers means they cannot do more than this, the entire UK presence in south eastern Iraq will be open to question."
The report said the Iraqi Army had made significant progress but still required logistical support from the British.
MPs welcomed the reduction of attacks on UK forces since they pulled out of their last base in the city but pointed out that there had been no corresponding reduction in the number of attacks against civilians.
The report explained: "The relative security of Basra is said to owe more to the dominance of militias and criminal gangs, who are said to have achieved a fragile balance in the city, than to the success of the multinational and Iraqi security forces in tackling the root causes of the violence."
It also warned that it was important not to overstate the success of the US troop surge in and around Baghdad, adding that it was still unclear whether recent improvements in the security situation would remain for the long term.
Furthermore, the committee expressed concerns over whether the Ministry of Defence budget would be able to complete the necessary amount of refurbishment work required to be carried out on British Army equipment.
The committee also said there was a discrepancy between the number of troops the Minister for Armed Forces said was needed to perform the 'overwatch role' and the numbers given by the prime minister.
Bob Ainsworth said in July 2007 anything below 5,000 would be "difficult to sustain".
But the prime minister announced in October 2007 that forces would be reduced to 2,500 from spring 2008.
Mr Browne added that he was satisfied that on the basis of the evidence he had received the prime minister's "figure of troops to tasks is the right figure."
BBC defence correspondent Caroline Wyatt said the committee had been reassured the withdrawal was not due to overstretch and the need for more troops in Afghanistan.
General Peter Wall, at the MoD, had told the committee that "were more forces needed at this stage of the campaign, the army could provide additional forces".
Defence Secretary Des Browne said: "We have always said that our obligations to the Iraqi nation will not end when all four provinces within our area of operations have been transferred to Iraqi control.
"The local security forces in Basra have grown in confidence and ability throughout the year."
He added: "Under the leadership of Generals Mohan and Jalil, they have proved able to handle the occasional security incidents swiftly and effectively.
"These are positive indications which bode well for the prospect of transferring Basra province to Iraqi control by the end of the year - an ambition which is shared by our Coalition allies and by the Iraqi government."
Mr Browne accepted that the Iraqi forces were "not the finished article".
But he added: "Our commitment in this role is undiminished. We will continue until the Iraqis themselves are confident they no longer need our assistance."
The chairman of the committee, Conservative MP James Arbuthnot, said the handover should go ahead despite the violence.
"Development of the Iraqi army is going much better than the development of the Iraqi police and the army in Iraq is able I think, in the south eastern part anyway, to take over control from British forces," he said.
"The trouble is the experience in every-day life terms of the Iraqi population in that area is largely experience of the police and we say they remain murderous, corrupt and infiltrated by militias and that's a real worry."