It will cease operation at the end of August, after being told it would no longer receive legal aid funding.
The Legal Aid Agency (LAA) ruled the firm had breached contractual requirements.
Defence Secretary Michael Fallon said the firm's closure was the "right outcome for our armed forces".
The LAA took its decision after reviewing information submitted by the firm, following a Solicitors Regulation Authority investigation.
PIL, which has offices in London and Birmingham, represented complainants in the Â£31m Al-Sweady inquiry into a 2004 battle in southern Iraq.
The firm was criticised when the inquiry's 2014 report concluded that the subsequent war crimes allegations were based on "deliberate lies, reckless speculation and ingrained hostility".
That report concluded the behaviour of some soldiers towards detainees breached the Geneva convention, but was highly critical of the claims it was initially set up to investigate.
These were that Iraqi detainees had been murdered, mutilated and tortured following the Battle of Danny Boy on 14 May 2004 near Al Amarah in southern Iraq.
The report found that British forces responded to a deadly ambush by insurgents with "exemplary courage, resolution and professionalism".
And it suggested some detainees - all described as members or supporters of the Mahdi Army insurgent group - lied about the most serious allegations, so as to discredit the British armed forces.
In 2010 PIL called for a full public inquiry into allegations made by 142 Iraqi civilians that they were abused by British soldiers in southern Iraq.
The firm's lead lawyer Phil Shiner said that the case "raises a number of very troubling systemic issues about the practices and techniques used on Iraqis".
He also called for a single inquiry into the UK's detention policy in Iraq.
In January 2014 PIL submitted a legal bid with the International Criminal Court to prosecute British politicians and senior military figures, for alleged war crimes in Iraq - a move which the then Foreign Secretary William Hague said should be rejected. It submitted the bid along with the European Center for Constitutional and Human Rights.
Speaking at the time, Mr Shiner said the move was "about individual criminal accountability for war crimes".
It led to an initial investigation into claims that UK forces abused Iraqi detainees being opened by the ICC.
And in September 2015 PIL and the ECCHR submitted further evidence, which the ICC says added "substantively to the allegations... expanding the list of alleged crimes in relation to new cases of alleged detainee abuses".
Mr Fallon said the UK's armed forces "show bravery and dedication in difficult circumstances".
"For too long, we've seen our legal system abused to impugn them falsely. We are now seeing progress and we will be announcing further measures to stamp out this practice."
A Number 10 spokesman said: "We made a manifesto commitment to addressing these types of spurious claims that companies like PIL are pursuing.
"The closure of PIL shows that we are making progress on that, tackling these types of firms head on to make sure we get the right outcome for our armed forces who show such bravery in the most difficult of circumstances."
The spokesman also said ministers were considering a "suite of measures" to prevent firms making bogus claims, including strengthening the penalties for abusers of the system.
The law firm Public Interest Lawyers, which submitted multiple allegations of misconduct by British troops during the Iraq War, is to close.