Prodi did not give details of when the government would seek to withdraw its troops but said it would take place after discussions with Iraqi authorities as a "technical timeframe" was needed.
"The government intends to propose to parliament the return of our soldiers," Prodi told the Italian senate in his first speech since being sworn in as prime minister on Wednesday.
"The war has not resolved but complicated the situation of security," he added to jeering from opposition senators.
However, Prodi said his government intended to maintain good relations with the US.
Silvio Berlusconi, Italy's former prime minister, had set a date for withdrawal of the country's 2,600 troops by the end of 2006.
Italy's centre-left parties had opposed the US-led invasion of Iraq three years ago, but Berlusconi's government backed it and sent peacekeepers to the country.
Berlusconi lost a closely contested election to Prodi's centre-left bloc in April.