Lawyers for six Iraqi men pushed for a public inquiry at the High Court
The judge who oversaw the trial of serial killer Dr Harold Shipman is to lead the inquiry into alleged war crimes by UK soldiers in Iraq.
Sir Thayne Forbes will chair the probe into claims that 20 Iraqis were killed and nine others mistreated at UK bases after a firefight in 2004.
The Ministry of Defence has pledged its "full support" for the inquiry.
It has always insisted the men died during the "battle of Danny Boy", named after a checkpoint in southern Iraq.
Defence Secretary Bob Ainsworth, who announced details of the inquiry, said "allegations of abuse [were] taken very seriously".
Former High Court judge Sir Thayne has been asked to investigate and report on allegations against British soldiers of unlawful killing at Camp Abu Naji on 14 and 15 May 2004, and ill-treatment of five Iraqis between 14 May and 23 September 2004.
Caroline Hawley, BBC world affairs correspondent
Lawyers for the Iraqis fought a long legal battle for this inquiry.
Whatever the truth of what happened after the battle of Danny Boy, it is the Ministry of Defence's (MoD) response to the allegations that has led to suspicions of some kind of cover-up.
The ministry is still denying the allegations of mistreatment as well as murder.
But it emerged in the High Court earlier this year that the government had known since 2004 that nine detainees had complained to the Red Cross.
An internal army document says a Red Cross doctor believed that facial injuries to the Iraqis suggested "that when the injuries were received the person had either been held down or defenceless".
It is because the MoD failed to produce these documents when required by the High Court that the government has had to agree to this inquiry.
Armed Forces Minister Bill Rammell said the MoD had "nothing to hide" and was "pleased" Sir Thayne had agreed to chair the Al Sweady Inquiry - which is named after 19-year-old Hamid Al Sweady, one of the Iraqis that died following the firefight.
The MoD has vigorously denied the allegations and always insisted the men died during the "battle of Danny Boy" between British soldiers and militiamen in the south.
But lawyers for six Iraqi men claim the civilians were killed after they were captured - not during the fighting, near Al Majar-al-Kabir in Maysan province on 14 May 2004.
They produced medical evidence at the High Court which they claimed supported allegations that captives were taken to the UK's Camp Abu Naji, where they were tortured, murdered and their bodies mutilated.
The government agreed to an inquiry after facing severe criticism from the High Court.
The judges in the case said the department's handling of disclosure of documents had been "lamentable".
Announcing details of the inquiry, Mr Ainsworth said: "Much work is in hand to ensure that the difficulties over disclosure which arose in the judicial review proceedings are resolved and that the inquiry has all the material it needs."
He added: "Over 120,000 British troops have served in Iraq and the conduct of the vast majority has been of the highest order.
"Although there have been instances of misconduct, only a tiny number of individuals have been shown to have fallen short of our high standards."
Phil Shiner, of Public Interest Lawyers, which represented the Iraqis in the High Court, said Mr Ainsworth's assertion that "no credible evidence" had been found to back up the allegations was "premature".
He said his clients were now hoping to get "what [had] long been denied them by the military: the truth".