Kennedy also accuses Prime Minister Tony Blair of being "in denial" about the fact that most Iraqis now view British and US soldiers as occupiers, not liberators, according to an advance copy of the speech to be delivered on Thursday.
Kennedy, attempting to counter accusations of weak leadership, takes a tough stance on both Iraq and anti-terror legislation, according to details of his keynote speech to his Liberal Democrat party's annual conference in Blackpool.
On Iraq, he accuses the prime minister of allowing his "pride" and his "blind support" for US President George Bush to stand in the way of a solution involving the phased withdrawal of British troops, according to details provided by Britain's domestic Press Association.
And on terror, he will accuse Blair of "playing politics" in his response to the 7 July bombs in London, by bringing forward illiberal legislative proposals without consulting opposition leaders.
In an attack on Blair's efforts to neutralise criticism of his conduct over Iraq, Kennedy charges: "However hard this government tries, it cannot 'move on'.
"You cannot move on when the Prime Minister remains in denial. You can't move on when people are dying every day. And you cannot move on when our British troops are still there in the firing line.
Kennedy: Blair's blind support of
Bush prevents a solution
"The government must confront the fact that the presence of British and American troops in Iraq are a part of the problem.
"After this week's events in Basra, we cannot sustain the myth that Iraqis see coalition troops as liberators. What they see is an occupation."
Two British undercover soldiers were arrested by Iraqi police in Basra after firing on an Iraqi police checkpoint.
Exit strategy needed
Protesting Iraqis pelted British troops with stones as they attempted to storm the police station where the pair were believed to have been held.
British soldiers dressed as Iraqis
were nabbed in Basra on Monday
They were eventually rescued from a house in Basra.
Kennedy will call on the government to lay out before parliament a clear exit strategy for the phased withdrawal of British forces from Iraq.
And he will say that "real efforts" must be made to find other countries "untainted by support for this disastrous war" who can send troops to help the Iraqi authorities with security.
The Liberal Democrats, the third largest party after the opposition Conservatives and governing Labour Party, are the only major British political party to have opposed the decision to join the US-led invasion of Iraq in March 2003.