"We will begin to reduce our contingent even before the end of the year, starting in September, in agreement with our allies," he said in an interview on state television RAI on Tuesday.
Italy has 3000 soldiers in Iraq, the fourth-largest foreign contingent after the United States, Britain and South Korea.
The announcement comes close on the heels of the release of kidnapped Italian journalist Giuliana Sgrena in Iraq on 4 March.
The release turned bloody after firing by US troops under controversial circumstances on the Italian entourage transporting Sgrena to safety.
Italian secret service agent Nicola Calipari was killed in the firing and Sgrena was injured.
Italian journalist Giuliana Sgrena
was injured by US shooting
The incident provoked widespread anger in Italy, with the government registering an official protest with Washington.
Berlusconi, considered Washington's closest ally in Europe, personally expressed anguish over the incident.
US President George Bush apologised for the shooting and instituted an inquiry.
But the resentment among Italians has not subsided.
Asked by reporters to comment on Italy's plan to reduce its force in Iraq, US Secretary of State Condoleezza Rice, on a visit to India, said she was certain any decision by Italy would be made in consultation with its allies.
She also praised Italy for its participation in Iraq.
"The real answer to Iraqi security will be when Iraqis can do those security tasks," she added.
The gap left by the Italians probably will be filled by British troops, more of whom will likely be deployed to Iraq, a British military expert said late on Tuesday.
Charles Heyman, a senior defence analyst for Jane's Information Group, was quoted by Britain's Press Association news agency as saying it would cost tens of millions of pounds for Britain to supply the additional troops for six months.
A large number of the Italians are under British command in the southern half of Iraq, and finding replacements will be as much a problem for the British as it is for the US, he was quoted as saying.
About 8000 British troops are
Many of the Italian troops are based in the town of Nasiriya within the Multi-National Division South East, which is headed by British forces but have personnel from other nations under their command.
Heyman said: "It's going to leave a big hole, there's no doubt about that. My gut feeling is that it's going to be hard to find a contingent to replace them.
"I think it's almost impossible for the Americans to produce another 3000 extra troops.
"We're probably going to be asked to help to fill the gap."
At present, there are about 8000 British troops in total in Iraq.
Meanwhile, Prime Minister Junichiro Koizumi said on Wednesday that Japan's deployment of 550 troops in Iraq would not be affected by Italy's withdrawal of troops.
"Italy is Italy, Japan is Japan," Koizumi said when asked if the prospect of a pullout by Rome could lead to a similar move by Tokyo.
"Italy is Italy, Japan is Japan"
Japanese prime minister
Japan has been a vocal supporter of the US-led military mission in Iraq and its contingent is based in the southern city of Samawa on a humanitarian operation in support of reconstruction.
The Netherlands and Ukraine have already begun a gradual withdrawal of their troops from the US-led coalition in Iraq.
About 150 Ukrainian soldiers were to fly home on Tuesday and about the same number of Dutch arrived home in Eindhoven on Monday.
About 800 Dutch soldiers remain in the southern Iraqi province of Muthanna and will return in batches over the next month.
Ukraine has about 1600 troops stationed southeast of Baghdad, whose phased withdrawal will be complete by 15 October.
Two Dutch soldiers were killed in Iraq, while Ukraine has lost 17 troops.