The decision to extend the mission, due to expire at the end of this year, was made at a cabinet meeting led by Prime Minister Lee Hae-chan, his office said.
"The government will send a motion to parliament seeking approval for extending the troop deployment in Iraq by another year," said Chung Yong-wook, an official from the office who attended the meeting.
About 2800 South Korean troops are based in Arbil, a Kurdish-controlled town in northern Iraq, on a rehabilitation and humanitarian mission. Another contingent of more than 700 is set to join them soon.
In February, parliament approved the dispatch of up to 3600 troops for relief and rehabilitation in Iraq until 31 December 2004.
But the deployment was delayed for months against a backdrop of growing anti-war protests and the beheading of a South Korean civilian by a group in Iraq.
It was only in late September that South Korea completed its initial deployment of 2800 troops in Arbil.
Political analysts say the government motion will easily win approval from parliament since the ruling Uri Party, which has a majority in parliament, has pledged to endorse an extended mission.
The conservative main opposition Grand National Party has also approved the troop deployment in Iraq.