UK troops in Basra are to be cut by 1,000 by the end of the year, Gordon Brown has said on a visit to Iraq.
Mr Brown also confirmed Basra province could be handed over to full Iraqi control within the next two months.
The Ministry of Defence announced in July that 500 troops would be withdrawn - 270 of whom are already back home.
The remaining 230 and a further 500 should be home for Christmas, Mr Brown has said. After that, 4,500 UK troops will remain, at the Basra Airport base.
The announcement was branded "cynical politics" by the Conservatives while the Liberal Democrats called for a timetable for the withdrawal of all UK troops.
Speaking in Baghdad, the prime minister said: "What we propose to do over these next few months is to move from a situation where we have a combat role to an overwatch role."
This would involve the present British force of 5,500 being cut to 4,500 - freeing up the troops for other duties, he said.
"Hopefully they will be home by Christmas," Mr Brown told reporters.
Mr Brown, on his first visit to Iraq since becoming prime minister, also announced plans for a new investment agency and development fund for Basra to help regenerate the economy.
He called for a renewed effort by the Iraqi political parties to achieve political reconciliation.
"I am very proud of what our armed forces are achieving here. I believe they have acted with great courage, professionalism and bravery," he said.
"We will discharge our obligations to the Iraqi people and to the international community and we will discharge our obligations to our armed forces, who are doing this difficult job."
Mr Brown landed at Baghdad International Airport under heavy guard on Tuesday morning before being taken by helicopter to the fortified Green Zone.
He was in talks with Iraqi Prime Minister Nouri Maliki for an hour.
Later, he left for Basra where he is meeting British troops.
He also met head of US forces, Gen David Petraeus who was positive about plans to withdraw troops.
"I think that's actually quite doable," he said.
BBC political correspondent James Hardy said Mr Brown would tell the Commons next week that more still needs to be done in Iraq including political reconciliation and economic regeneration.
But army figures are warning that a significant force will have to stay indefinitely, our correspondent said.
It is thought British forces are likely to stay in Basra for up to two more years on "overwatch", which involves mentoring and training the Iraqis rather than patrolling.
Conservative leader David Cameron said he would support a withdrawal of some British troops from Iraq if local forces were ready to take over.
"If it is now possible to hand over progressively to the Iraqi army and to bring more of our troops back home, then he will certainly have my support," he told BBC Radio 4's Today programme.
Later, at the Conservative Party conference, shadow defence secretary Liam Fox accused Mr Brown of pursuing photo opportunities.
"A week ago Gordon Brown gave only around a minute of his 67-minute speech to the issues of Iraq, Afghanistan and our armed forces combined; but today he is happy to use our armed forces for a pre-election photo opportunity," he said.
"Most people will see this cynicism for what it is. Our troops should not be used as a political football."
Liberal Democrat leader Menzies Campbell welcomed the move but said the rest of the troops needed to be sent home too.
"The overriding question is whether there is any military or political benefit to be gained from the continued presence of our armed forces in Iraq. The answer is clearly no," he said.
Lindsey German, convener of the Stop The War Coalition, said the withdrawal of troops was a welcome development, but was not "a serious attempt to deal with the disastrous Iraq war".
Meanwhile, Britain's consul general in Basra, Richard Jones, has told the BBC the dominant feeling among local people was fear.
He said the local police force had been infiltrated by hardline Shia militias.
Iraqi residents told the BBC they feared that could mean all-out war between rival militias once Britain hands over security to local forces.
Mr Brown has prepared for many weeks to announce that British troops will finally be able to hand over the last of four provinces to Iraqi forces to control.