Foreign Minister Borys Tarasyuk's announcement on Tuesday will affect some 1600 Ukrainian soldiers stationed in the war-torn country.
Tarasyuk added that he planned to visit Iraq "in order to examine the situation".
But to uphold good relations with the US, newly installed President Viktor Yushchenko said he would consult Washington, as well as the authorities in Baghdad, before the pullout.
The plan for reduction comes as the Polish government also said it planned to reduce its 2400-strong contingent.
Both Yushchenko and his defeated opponent in the long presidential election, Viktor Yanukovich, had called for a troop withdrawal.
But within days of being inaugurated, Yushchenko said the pullout must not harm US or Iraqi interests.
Ukrainian troops have been under
Polish command in Iraq
Ukraine's dispatch of troops to Iraq had helped improve the country's ties with Washington, after relations soured on allegations that former president Leonid Kuchma's administration had sold weapons to Iraq while Saddam Hussein was in power.
Tarasyuk said Yushchenko's government would make concerted efforts to improve ties with Washington.
"For more than four years if it cannot be said that our relations were at a standstill, we can say that they were stagnant. Mutual trust was lost," he said. "Our task now is to restore that trust."
Yushchenko is scheduled to meet US President George Bush and other Nato alliance leaders in Brussels in February.
El Salvador deployment
In a separate development, a new contingent of troops from El Salvador, consisting of 380 soldiers, is likely to head to Iraq soon, where they will replace Salvadoran forces already operating there.
"President [Antonio] Saca will confirm tomorrow (Wednesday) that a fourth contingent of 380 soldiers will be going to Iraq. He will confirm that fresh troops will be there for six months," a military source said.
The new contingent's date of departure has not yet been announced, but troops currently in Iraq are expected to return at the end of February.
El Salvador is the only Latin American country still supporting the US post-war effort in Iraq with a military presence.