The US military commander in Iraq, Lieutenant General Ricardo Sanchez, told reporters on Saturday that the Iraqi troops' mass walkout was caused after complaints that their monthly salary of around $60 dollars was insufficient to support their families.
Top pay is about $180 for a colonel.
On Thursday 300 soldiers resigned, leaving only 400 troops and forcing the US army to explain the embarrassing circumstances.
Sanchez said there would be some "decisions" made in the coming weeks on the the pay scales.
The general said the battalion, which began rounds in October after a nine-week basic course, would continue to train, and claimed morale remained high.
Sanchez said he did not see any let-up in the occupation's
efforts to recruit an Iraqi security force, saying their target was still valid.
The coalition is hoping to build an Iraqi army of about 40,000
soldiers in 27 motorised infantry battalions by next September.
A new 550-strong Iraqi Civil Defence Corps battalion, made up of recruits sent by Iraqi political parties, should be on the ground, battling ousted Iraqi leader Saddam Hussein's loyalists by the end of the month, said Sanchez.
Sacked Iraqi soldiers demanded
their pensions on Saturday
He stressed the battalion would be under American command and the political party members would be grouped in integrated units.
However, the battalion has raised alarm among Sunni leaders who fear such a unit, whose members have been sent explicitly by political parties, could plant the seeds for civil war among the numerous factions and religious sects.
The US occupation administrator Paul Bremer sacked the Iraqi army in April after occupation forces swept into Baghdad.
Resistance attacks unabated
Sanchez also said that despite a string of recent fatalities, resistance attacks on occupation forces had fallen to "around 20" per day.
"We have achieved a significant decrease in attacks," he said.
November proved to be the deadliest month for US soldiers in Iraq with the number of daily attacks surpassing 35 and hit 55 on one occasion.
Sanchez said dramatic raids would be scaled-back and instead, "cordon-and-knock" style operations would be used to track down loyalists of ousted Iraqi leader Saddam Hussein and resistance fighters. The change is aimed at sparing civilians and preventing troops from alienating Iraqis.
Amid the dogged unrest, Georgia is to send 500 soldiers to Iraq by next summer, said US ambassador to Tbilisi Richard Miles on Saturday. They will join 70 elite troops, doctors and mine-clearing experts who were sent to Baghdad in August.