Bush asked that the allowances be in place on 1 October, and that he would ask for more next year.
"While we do not know the precise costs for operations next year, recent developments on the ground and increased demands on our troops indicate the need to plan for contingencies," he said in a statement.
"I am requesting that Congress establish a 25 billion dollar contingency reserve fund for the coming fiscal year to meet all commitments to our troops and to make sure we succeed in these critical fronts in the war on terror," he said.
Bush, who had promised not to ask more money for Iraq before the 2 November presidential elections, said he would submit a more precise spending request, known as a supplemental, for the full year once needs are better known.
However, he vowed in 2003 to give US forces occupying Iraq whatever resources they needed to complete their mission.
Senate Democratic minority leader Tom Daschle, called the announcement "a major policy shift" by the Bush administration.
Falluja seige forced war budget
"After repeated assurances that no additional resources would be needed at this time, the administration announced it will require an additional 25 billion dollars on top of the roughly 120 billion dollars ... already appropriated," Daschle said in a statement.
"While I am committed to ensuring that our troops have the resources they need ... it's also true that success in Iraq demands more than another request for additional funds that will add to our already record deficits."
In February, the White House had sent the US Congress an overall budget request of 2.4 trillion dollars, while insisting that the 87 billion dollars already approved would be enough to cover the war in the current fiscal year.
But surprisingly tough resistance operations, including violent clashes in and around the Iraqi cities of Fallujah and Najaf, have forced the Pentagon to rethink its military planning ahead of the political reorganising process on 30 June.
Defence secretary Donald Rumsfeld announced on Tuesday plans to maintain a force of about 138,000 troops in Iraq through next year, and ordered the deployment of 10,000 combat troops to replace units serving extended tours of duty.
Dr Mustafa al-Bazergan, head of the Iraq Infosearch Centre in London, told Aljazeera.net that he believes, one of the main purposes behind Iraq's occupation is to fight "terrorism" on one front.
"It was not easy for the US to fight terrorism all over the world. One of the main benefits of occupying Iraq, is the country has become an attraction point to all anti-US factions" Bazergan said.
"Now all anti-US factions are gathering and fighting Americans in Iraq. But it seems that the US administration did not expect the high level of anti-US resistance operations it is facing in Iraq."