Some 1,600 British troops will return from Iraq within the next few months, Prime Minister Tony Blair has told MPs.
Some 7,000 UK troops are currently serving in Iraq
He said the 7,100 serving troops would be cut to 5,500 soon, with hopes that 500 more will leave by late summer.
Remaining troops will stay into 2008, to give back-up if necessary and secure borders, but the Iraqis would "write the next chapter" in Basra's history.
The announcement follows a five-month security operation to quell violence in British-controlled Basra.
Mr Blair said Operation Sinbad, aimed at allowing Iraqis to take the lead in frontline security in the city, had been successful.
He acknowledged that Basra was still "difficult and sometimes dangerous", but he said levels of murder and kidnappings had dropped and reconstruction was under way.
"The UK military presence will continue into 2008, for as long as we are wanted and have a job to do.
"Increasingly our role will support and training, and our numbers will be able to reduce accordingly," Mr Blair said.
"What all of this means is not that Basra is how we want it to be. But it does mean that the next chapter in Basra's history can be written by Iraqis".
He said that it was important to show the Iraqis that Britain - and the other multinational force members - did not intend their forces to stay longer than necessary.
Later Defence Security Des Browne said he expected the government to look again at the numbers of troops being withdrawn at the end of the summer.
"I am absolutely confident that by the end of the year we will be able to reach the prediction I made which was by the end of this year we will have reduced our troop level by thousands," he said.
British forces will hand over all bases to local authorities, except for Basra air base and Basra Palace, and most will withdraw to the air base shortly.
Iraq's Deputy Prime Minister Barham Saleh told BBC Radio Five Live: "We need to affirm our gratitude and appreciation for the British contribution to the liberation of Iraq.
"This redeployment of troops comes in the context of transfer of security responsibilities to the Iraqi government.
"When we assumed sovereignty two and a half years ago Iraqi security services were almost non-existent. Today we have tens of thousands of Iraqi police and Iraqi military."
Conservative leader David Cameron told the Commons that the announcement would be "welcomed in this House, in the country and especially to the families of those serving in Iraq over the coming months."
But he said that the security situation in Basra remained "dire" and urged Mr Blair finally to accept the need for an inquiry into the Iraq war to "learn the lessons" of "many bad mistakes".
Liberal Democrat leader Sir Menzies Campbell, whose party opposed the war in Iraq, said the target should be the full withdrawal of British troops by the end of October.
He added that the "unpalatable truth" was that Britain was leaving behind a country on the brink on civil war.
"This is a long way short of the beacon of democracy for the Middle East which was promised some four years ago," he said.
The proposed cut in numbers of British troops comes at the same time as 21,500 more US troops are being sent to Iraq.
President Bush's opponents say it shows the British have split with his policy, but US Secretary of State Condoleezza Rice said the coalition "remains intact".
There are approximately 132,000 US personnel currently in Iraq accounting for more than 90% of the occupying force
Iraq is divided into 5 main military zones. The US controls the north and west of the country, as well as Baghdad
The Centre-South is run Polish forces, but US troops lead any major operations against insurgents in this area
The UK's 7,100 soldiers are based in the South East zone. Three provinces - Muthanna, al-Najaf and Dhi Qar are now under provisional Iraqi control. Basra and Maysan provinces are expected to follow suit in the first half of 2007