Reid told the lower House of Commons on Monday that the forces could be withdrawn in May because more Iraqi forces were ready to carry out duties performed until now by British troops.
Nearly 235,000 members of the Iraqi security forces are now trained and equipped, with 5000 more signing up each month, he added.
British forces will still control operations for both their own troops and Iraqis for the time being, he said.
"But let me stress that the significant reductions I have announced are not part of the handover of security responsibilities to the Iraqis themselves...," he said.
US pull-out unclear
A Joint Committee to Transfer Security Responsibility, involving coalition partners and Iraqis, will meet in the coming weeks to discuss whether conditions were right for some provinces to begin a full handover, he added.
The announcement marks a reduction of about 10% in British strength in Iraq.
The country's troops are mainly based in Iraq's four southern provinces.
British troops are likely to be
pulled from less violent areas
The date for a full pull-out of all US-led coalition troops from Iraq has been the source of much media speculation in Britain.
British Lieutenant General Nick Houghton told The Daily Telegraph earlier this month that Britain would withdraw most of its troops from Iraq by the middle of 2008 under a phased withdrawal that could begin within months.
Civil war fears
Reid played down fears of civil war. He noted that although violence had surged in some areas - particularly after the bomb attack on the Shia mosque in Samarra, north of Baghdad - there were pleas for calm from the leaders of Iraq's rival communities.
"Our analysis is that civil war is neither imminent nor inevitable," he added, after some commentators expressed concern that the violence could escalate into all-out conflict between Iraqi opposition groups.
He also reiterated his stance on Britain's presence in Iraq, stating: "We will stay as long as we are needed and wanted and until the job is done. Today marks another significant step in that direction."
Britain continued to be "steadfastly" committed to Iraq and the coalition, he added.
Reaction to the announcement was mixed. Christopher Langton, from the London-based International Institute for Strategic Studies, said remaining forces were unlikely to be overstretched.
"Our analysis is that civil war is neither imminent nor inevitable"
John Reid, British defence secretary
Troops were likely to be withdrawn from "softer areas" with fewer violent attacks, the former British army colonel added.
Anti-war campaigners said it was not enough and demanded a full pull out.
The smaller opposition Liberal Democrats, which was opposed to military action, called for a clear exit strategy, while the main opposition Conservatives asked if the troop reduction was connected to Afghanistan.
About 4600 extra British troops are to be sent to Afghanistan, including 3300 to help with reconstruction and counter-narcotics in the lawless southern Helmand province.
Nearly 1100 British troops are already in Afghanistan.
But Reid stressed on Monday: "There is no connection with Afghanistan."