Iraq will repay the remaining debt over 23 years, including a six-year grace period, a Foreign Ministry spokesman said on Thursday on condition of anonymity.
The agreement comes after members of the Paris Club, which represents the world's main creditor nations, decided to reduce by 80% the $38.9 billion Iraq owes to its member states.
The US last year forgave Iraq 100% of its debt of $4.1 billion.
Iraq owes another $80 billion to various Arab governments, mainly Saudi Arabia and Kuwait.
Iraqi Foreign Minister, Hoshyar Zebari, who flew in from the Russian capital of Moscow on Wednesday, also repeated Iraq's request that Japan should extend its troop deployment during his meeting with Japanese Foreign Minister, Taro Aso, the public broadcaster NHK reported.
Aso responded that Japan would be deciding soon, giving consideration to its "international responsibilities and the state of reconstruction work" in Iraq, the broadcaster said.
The minister's visit comes as Japan is mulling whether to extend its military mission in the southern Iraqi city of Samawa, where about 600 Japanese troops are stationed to purify water, rebuild schools and other tasks.
About 600 Japanese troops are
deployed in Samawa, south Iraq
Japan's mission expires on 14 December, but Tokyo has not decided whether to extend it.
Prime Minister Junichiro Koizumi, who is pushing for a more active role for Japanese troops in international security, has suggested that Japan's efforts in Iraq are not finished.
Last month, Japan's parliament approved a one-year extension of the country's naval mission to support US-led troops in Afghanistan.
Zebari was scheduled to meet Chief Cabinet Secretary Shinzo Abe later on Thursday and Koizumi on Friday.