The Dutch contingent has been based in the Muthanna province, in southern Iraq, since August 2003 and parliament in June extended their stay until March 2005.
"We think that by March 2005 the security situation in al-Muthanna will be stable enough to hand over the task to Iraqi security," defence ministry spokesman Otte Beeksma said on Friday.
"This does not mean we won't have a presence in Iraq at all. We will send about 100 men to provide support and training in the Nato training mission," he said.
The Netherlands has been under US and British pressure to keep its troops in Iraq beyond the March deadline as the interim administration tries to contain mounting violence and hold elections.
Foreign Minister Bernard Bot recently suggested an extension might be possible, but Defence Minister Henk Kamp said the cabinet had now ruled that out.
Nato agreed in June to set up a military academy outside Baghdad to complement a far larger US-led operation aimed at training 150,000 security personnel before Iraqi elections.
Threats in Netherlands
The Dutch presence in Iraq, an issue which has divided public opinion, has led to several threats from Islamist groups.
The Netherlands will contribute to
a Nato training mission in Iraq
The Netherlands has been under a heightened security alert since July when a man was arrested on suspicion of planning attacks on key buildings, including Amsterdam's Schiphol airport and parliament.
The government also believes it has foiled a new attack with a spate of arrests since the murder last week of filmmaker Theo van Gogh, whose criticism of Islam enraged some Muslims.
In Iraq, two Dutch soldiers have lost their lives, one in May and one in August, while a commander was flown back to the Netherlands pending an investigation following a shooting incident in which an Iraqi civilian was killed.
Japanese troop rotation
Meanwhile, Japan has sent some 200 troops to Iraq to relieve forces in the country as Tokyo looks set to extend its historic military deployment for another year.
The troops are part of Japan's fourth contingent to be sent to the southern Iraqi city of Samawa and will be joined by the remaining 300 troops in their mission by the end of the month.
Japanese troops are stationed in
the southern city of Samawa
The troops would stay in Kuwait for a week for training before heading for Iraq, where Japan has deployed troops for the first time since World War II to a country of active combat.
The troops were seen off by Defence Agency Director-General Yoshinori Ono and their family members.
"I would like to carry out our humanitarian mission from the
standpoint of Iraqi people," Colonel Kizuku Fukuda, who leads the fourth Iraq reconstruction assistance brigade, told a news
conference after the farewell ceremony.