US Secretary of State Colin Powell said it was essential the 135,000 troops who invaded and occupied Iraq without a UN mandate continue to operate under US command.
"I hope they will understand that in order for this government to get up and running - to be effective - some of its sovereignty will have to be given back."
"We have to be able to operate freely, which in some ways infringes on what some would call full sovereignty."
The US has insisted it is sticking to the planned timetable of transferring power to an interim Iraqi government after 30 June despite retaining control of the military in the face of growing resistance.
Speaking in Washington on Monday, Powell said the occupation authority did not mean to "seize anything away" from the planned caretaker government.
But the current head of the US-selected Iraqi Governing Council, Masud Barzani, accused the US of behaving like "an army of occupation".
"I hope they will understand ... some of its [Iraq's] sovereignty will have to be given back"
US secretary of state
"I probably wouldn't have made the mistake of letting an army of liberation turn into an army of occupation."
The US has placed much of its hopes for ultimately extrictating itself from Iraq in the hands of the UN envoy al-Akhdar al-Ibrahimi.
Al-Ibrahimi has proposed a caretaker government led by a prime minister, a president and two vice presidents take over until elections can be held by January.
Powell said he was sure whatever new Iraqi government emerged, it would legitimise the presence of US-led troops in Iraq.
Powell also sought to damp down the view, voiced by many analysts, that the massive 3000-employee US Embassy in Baghdad, led by ambassador John Negroponte would be the real government.
Dismissing a "viceroy" Negroponte jibe, Powell said he hoped any new government would "exercise more and more control over the ministries, over the priorities for reconstruction, over answering questions of their people".