The pullout, long discussed by Warsaw, is due to take place after Iraq's parliamentary elections scheduled for 30 January, and coincides with the transfer of Polish troops to a safer region in the war-torn state.
"As of mid-February troops and military staff in Iraq will number up to 1700," Szmajdzinski said after a government meeting on Tuesday. "Our intentions are known to our allies and the vacancies (in the division) will not be filled."
He said a 700-strong reserve force based in Poland would remain on two-day alert.
With the help of US cash and Nato logistics, Poland heads an 8000-strong multinational force, whose headquarters is being relocated to southern Iraq from the historic city of Babylon.
Warsaw, pressed by popular opposition to the deployment, has already said it would "not remain in Iraq an hour longer than is sensible", and in October Szmajdzinski floated the idea of withdrawing all troops by the end of 2005.
The announcement further reduces the role of the multinational division, already hit by Hungary's decision to pull out its 300 troops. Ukraine may also pull out its 1600 troops - second only to Poland's 2500.
With nearly three quarters of Poles opposed to the deployment, the government is under pressure to pull its forces out from Iraq. Seventeen Poles have died in Iraq over the past 15 months.