The UK has "confidence" it may be able to hand Basra's security to Iraqi forces "at some point next spring", the UK's Foreign Secretary has said.
Margaret Beckett told MPs Iraq's fate was "hanging in the balance" and said it was necessary "to hold our nerve".
"The progress of our current operation in Basra gives us confidence we may be able to achieve transition in that province... at some point next spring."
The Foreign Office said this did not mean all UK troops would be leaving.
'Well under way'
The UK has 7,200 troops in the south of Iraq, mostly stationed in and around Basra.
Mrs Beckett made it clear that the handover was not definite, saying that to leave too early would make the bloodshed "even worse".
She said she expected Najaf to be the next city to be transferred to Iraqi control in December.
And she predicted that British-controlled Maysan could follow in January.
Mrs Beckett's comments are the most explicit the government has been about the timetable for a reduction in British troops.
According to a defence source, the plan is for forces to leave Basra City and pull back to a base at the airport during the next rotation of British troops in the spring.
BBC correspondent David Loyn, in Baghdad, said sources were describing the proposal as a "real rethink of policy".
The key conditions for withdrawal are not now improving the violence but potentially handing over the war to Iraqi forces, our correspondent said.
Mrs Beckett told MPs: "The process of transferring security responsibilities to Iraqi security forces is well under way.
"Prime Minister Maliki is determined to press ahead with that and we are equally determined to help him to do so successfully and sustainably."
'Troops to remain'
Mrs Beckett added: "British soldiers and civilians alike are working in tough conditions and with considerable courage to try to help to build a better future for the Iraqi people - and the horrific murder of some of our servicemen and women in Basra on Remembrance Day just underlines both their courage and their sacrifice.
"And indeed the appalling reports of killings and kidnappings which we continually hear are a clear sign that the fate of that country is hanging in the balance.
"But as I have said to this House before, we owe it to our own forces and to the Iraqi people to hold our nerve in this critical period."
Basra, Iraq's second biggest city, remains dangerous with Shiite factions battling each other for control.
A Foreign Office spokesman said that even if control was handed over in the spring, there would continue to be a British troop presence in southern Iraq, for the purpose of "overwatch" and training.
It would be up to the Ministry of Defence at the time to assess how many troops remained.
Liberal Democrat leader Sir Menzies Campbell said: "Mrs Beckett's comments are notable as much for what she doesn't say as for what she does.
"There is no indication that if control of Basra were to be handed over next spring the deployment of British troops would be reduced."
Shadow foreign secretary William Hague told MPs: "We agree the adoption of an arbitrary timetable for withdrawal would be unwise, given that this would obviously set a timetable for insurgent activity."
Last week, Prime Minister Tony Blair was asked whether the violence in Iraq had "so far been pretty much of a disaster".
He replied: "It has."
But Downing Street later said the prime minister's words had been misinterpreted.
The Iraqi death toll hit a record high in October, with more than 3,700 people losing their lives in the ongoing violence, according to a UN report.