Des Browne said in a defence policy speech in London: "I have been pressing our planners ... to make sure we do not ask a single soldier to remain in Iraq longer than is necessary."
Addressing the Royal Institute of International Affairs at Chatham House, Browne said: "The planning for this has been going on for some months.
"I can tell you that by the end of next year, I expect numbers of British forces in Iraq to be significantly lower, by a matter of thousands."
"In the end of course, it must depend on conditions on the ground, including the level of threat and the capacities of Iraqis to deal with it, and the final decision will be down to our commanders," he said.
Since May 2003, 126 British troops have been killed in Iraq. Most UK soldiers there are based in and around the southern city of Basra.
Dividing Iraq "no solution"
Browne also said: "Dividing Iraq into Sunni, Shia and Kurdish areas might appear seductive but it would not solve sectarian tensions.
"A divided Iraq would also threaten regional stability. Even without that division, Iraq is vulnerable to becoming a crucible for wider regional tensions.
"It is vital now that Iraq's neighbours give it full support and undivided support.
"Even Syria, whose motives the international community has often had cause to question, has shown signs of constructive engagement."
Margaret Beckett, the British foreign secretary, said last week that Britain may be able to hand over security responsibility in Basra by the spring.
