New Australian PM Kevin Rudd has held talks with Iraqi counterpart Nouri Maliki on a surprise visit to Baghdad.
Mr Rudd won a landslide victory in the general election last month with a key pledge to bring back Australian combat troops by the middle of next year.
The Iraqi PM said he had expressed appreciation for Australia's help with security and the economy.
Mr Rudd's predecessor, John Howard, was a key ally in US-led Iraq operations and deployed about 550 combat troops.
In a joint news conference with Mr Rudd, Mr Maliki said: "I am happy that the [Australians] were a partnership in success."
Mr Rudd said the withdrawal would affect only combat troops in the south and Australia would continue to help train the Iraqi army and police.
He also promised 100 scholarships for agricultural training in Australia.
"I am the son of a farmer and I welcome the developing co-operation with the two countries. I look forward to strengthening bilateral cooperation in the years ahead," he said.
Apart from the combat troops, Australia has about another 1,000 involved in Iraqi operations - mostly outside the country.
Some troops will remain to guard the Australian embassy.
The US has warned allies against early withdrawals, saying they will undermine attempts to improve security.
Since his election Mr Rudd has sought to stress that the US remains a key ally.
He was swept to power on 24 November after 11 years of conservative rule under Mr Howard.