The US-appointed Iraqi Governing Council has decided to expel an Iranian opposition group this month.
A Council spokesman told the BBC the People's Mujahideen's offices were to close and its members ordered to leave Iraq voluntarily or face deportation.
The group's expulsion was likely to improve relations with neighbouring Iran, the spokesman said.
The Mujahideen were driven out of Iran in the early 1980s following a power struggle and given sanctuary in Iraq.
The spokesman did not say where the 5,000 members would go at the end of the year but that the group's arms and financial resources would be confiscated and the money given to victims of Saddam's regime.
"Iraqi individuals and bodies have the right to bring complaints against this organisation for its crimes and ask to be compensated by the funds this organisation has both inside and outside the country," he said.
Iran has said rank and file members would be welcome to return home, but wants senior members to be extradited.
Thorn in side
The People's Mujahideen, or Mujahideen-e Khalq Organisation (MKO), has been a thorn in Tehran's side for more than two decades.
A violent organisation, whose ideology combines elements of both Marxism and Islam, the group based itself in Iraq after being expelled from Iran.
Members then carried out cross-border raids in Iran, which fought a war with Iraq between 1980 and 1988.
Although the group kept out of this year's US-led Iraq war, their bases were bombed by US warplanes but after negotiations they reached a truce with the Americans and withdrew to their base, north-east of Baghdad.
Both the US and Iran consider the group a terror organisation.
BBC regional analyst Pam O'Toole says that although the latest decision will improve relations between Iran and Iraq, a number of questions remain unanswered.
She says it is still unclear who is responsible for the expulsion, how it will be done, where the members would go or what Iraq will get in return.
A source in the Council expressed doubts about the timing of the decision when Iraq is facing so many other pressing problems.