Australian troops will leave Iraq by the middle of next year after the Iraqi government set a deadline for the exit of all foreign forces from the battle-scarred nation.
The new timetable applies to all coalition partners except the United States, which has a separate agreement to leave Iraq by 2011.
The Iraqi cabinet overnight approved draft laws, which still have to be approved by the parliament, to have all non-US forces out of the country by July.
"The cabinet has approved draft legislation on the withdrawal of non-US forces in the coalition," said Hummam Hammudi, chairman of parliament's foreign affairs committee.
"It sets a timetable for a withdrawal of between five and seven months from January 1."
Coalition forces presently operate under a United Nations mandate, which expires at the end of this year.
Australia, Britain and other coalition partners have been negotiating with Iraq over ways to legally keep forces in the country once the mandate expires.
The Australian government has repeatedly flagged its intention to continue its rebuilding work in Iraq.
On Wednesday, Defence Minister Joel Fitzgibbon's office reiterated comments made by the government last month when it was revealed Diggers may not have a mandate to operate in Iraq by the end of the year.
"The Australian government remains committed to assisting Iraq and our coalition partners in achieving long-term stability and security in that country," a spokesman for Mr Fitzgibbon said.
"Australia is in discussion with Iraq and the US on how we can continue to contribute to Iraq's future, including through ongoing defence assistance.
"Australia's main focus is increasingly on supporting the Iraqi people through an expanded humanitarian aid program, including capacity building, infrastructure and development projects."
Australia has about 980 troops based in Iraq and around the Middle East.
The exact number of troops affected by the Iraqi decision is unclear.
Australia's main combat forces left Iraq earlier this
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