Negotations have been taking place over the terms of the withdrawal
British forces could begin pulling out of Iraq by next March, a senior defence source has revealed to the BBC.
The UK has been negotiating the legal basis on which its forces can stay when its UN mandate expires at the end of the year.
It still has 4,100 troops in Basra but defence chiefs plan a withdrawal over the next year if Iraqi elections in January pass off peacefully.
A withdrawal could allow soldiers to be diverted to Afghanistan.
Prime Minister Gordon Brown has indicated that almost all British troops should leave Iraq by the middle of next year, with a few hundred possibly remaining to train Iraqi security forces.
Previously it had been suggested that troops could start leaving in January.
However, the BBC has learned that the process is likely to begin in March - six years after the US-led invasion.
A Ministry of Defence spokeswoman said: "Significant progress has been made in Basra, a city which has now been transformed thanks to Iraqi, coalition and British efforts.
Some troops could eventually be redeployed to Afghanistan
"As such, we are now expecting to see a fundamental change of mission in early 2009."
The majority of the British troops are confined to Basra air base.
The Iraqi parliament may have to vote on any deal to allow British troops to remain in the country beyond the end of the year.
It recently agreed a similar deal which allows American forces to remain in Iraq for another three years.
US troops are due to pull out of Iraqi cities by the middle of next year, and be gone completely by December 2011.
The US is planning to boost the strength of its force in Afghanistan in the new year and is hoping its Nato allies follow suit.
BBC defence correspondent Caroline Wyatt said the withdrawal of British troops from Iraq "should allow a renewed focus on the multi-national mission in Afghanistan, which is facing a stalemate".
She said it would free up helicopters, intelligence assets and eventually troops for the battle against the Taleban.