Motorists will now be allowed 30 litres each, compared with 50 litres previously, said Abd al-Sahab Salman Qutb, counsellor to Iraqi interim oil minister Ibrahim Bahr al-Ulum on Wednesday.
On 10 December, the ministry restricted purchases to 50 litres each, at a price of 20 dinars (one cent) each, in an effort to curb lengthy queues at filling stations.
Motorists say queues for petrol, some as long as three kilometres, have become increasingly common since the Muslim holy month of Ramadan ended in late November.
Qutb said the new restrictions "were introduced because of the continuing shortage of gasoline and to allow a larger number of Iraqis to be served".
In another attempt to resolve the problem, authorities will adopt an alternate traffic flow system in which cars with even-numbered registrations can drive on one day while odd-numbered vehicles can be on the road the following day, he said.
The measure begins on Friday but it is unclear how it will be enforced since many cars in Iraq carry no licence plates.
The alternate registration scheme is designed to reduce Baghdad's severe traffic jams, which Qutb blamed on the arrival of hundreds of thousands of additional cars since US-led forces overthrew Saddam Hussein in April.
Vehicles can be imported duty-free until the end of the year.
Queues can stretch for as long
as three kilometres
Iraqi officials and members of the US-led occupying administration have insisted the country is not facing an oil crisis and the problem will soon resolve itself.
In a statement last week the oil ministry said it had formed a joint task force with occupation authorities to "examine the supply challenges, black market activities and public perception issues that are causing fuel lines around the country."
US armoured vehicles are stationed outside some gas stations and soldiers help direct traffic.
When it first announced rationing on 10 December the ministry said petrol station operators who sell to the black market face lengthy jail terms under a new law.
In Baghdad the measure appears to have helped curb the roadside trade by illegal operators selling fuel from jerry cans. It also means people who can't wait for hours outside a gas station cannot get fuel.
Qutb said the oil minister is working "to assure a sufficient supply of petroleum products to the local market."
The oil ministry has said its Kirkuk to Baghdad pipelines have been sabotaged although the number of attacks has decreased as the ministry improves security.
Ten days ago Iraq received 4 million litres of fuel from Turkey. The country has also signed a contract with Iran for millions of litres, said the ministry.