Iraq "must come to a point where it must guarantee its own security," the Italian leader told reporters on Friday at the end of the G8 summit in Scotland.
Berlusconi has come under increasing pressure in Italy over his support for the US-led coalition in Iraq.
However, Berlusconi, added that any withdrawal plans would depend on security conditions on the ground and could change.
He said the partial pullout would not compromise security for the remaining Italian troops or the zone of southern Iraq under their control.
He denied a withdrawal was linked to any terrorist threats against Italy, although he said he was not underestimating the potential danger.
In Rome, Defence Minister Antonio Martino said in a statement that the reduction of the Italian contingent would occur "on the basis of a precise schedule that will always be agreed upon with our allies and the Iraqi government."
Berlusconi, a staunch ally of US President George Bush, sent 3000 troops to Iraq after the ouster of Saddam Hussein. The contingent is based in the southern Iraqi city of Nasiriyah.
Berlusconi is criticised for his
support for the US-led coalition
In recent months, Italian officials have gone back and forth on when a withdrawal might begin. Berlusconi had said September was a possibility, but Foreign Minister Gianfranco Fini then talked of early 2006.
On Friday, Berlusconi said he has spoken "several times" to Bush and British Prime Minister Tony Blair about starting to withdraw Italy's contingent.
Relations between Washington and Rome have been strained in recent months - first by the killing of an Italian intelligence agent by American soldiers in Iraq and then arrest warrants issued by an Italian court that is accusing 13 purported CIA operatives of kidnapping a militant Egyptian cleric from Italy and sending him to Egypt, where he was reportedly tortured.
A State Department spokesman, Tom Casey, said in Washington that "we very much appreciate the firm and steadfast support that the Italians and Italian government has provided to the operation in Iraq."
"I am sure that whatever the Italians do in terms of future movements or changes in terms of their fullest force posture will be done fully in coordination with the multinational force," he said.
Pressure on Berlusconi has been mounting, even from within his own conservative coalition.
Reforms Minister Roberto Calderoli of the right-wing Northern League party said on Friday the time had come for the United Nations to begin discussing "the progressive withdrawal of troops, beginning with our contingent, perhaps by September."
"The time has come to begin to think also about our house, and to use the same resources currently committed in Iraq to prevent and combat possible attacks on our territory"
Italian Prime Minister
"It's evident that after New York, Madrid and London, Italy represents the most probable next objective of the terrorists," he said.
"The time has come to begin to think also about our house, and to use the same resources currently committed in Iraq to prevent and combat possible attacks on our territory."
Berlusconi said Italy is a potential target, but added, "It could happen to us as it could happen to another country."
"I think that to the terrorists the enemy is our way of life, our philosophy of life, our civilization," he said.
Berlusconi indicated that the intention to start pulling the troops out was not the consequence of threats against Italy or himself that appeared recently on the Web, saying that he had "grown used to them, even though I do not underestimate these threats."
A group calling itself The Secret Organisation of al-Qaida in Europe - which claimed responsibility for Thursday's bombings in London - said the attacks were a punishment for British involvement in the US-led wars in Iraq and Afghanistan.
The statement also said Italy and Denmark would be attacked for their support of the US-led coalitions in both countries.