Prime Minister Gordon Brown insisted yesterday that the withdrawal of British soldiers from their last base in Basra city did not amount to a "defeat" for the UK in southern Iraq.
The transfer of 550 troops from Basra Palace to the UK-controlled airbase outside the town began at 1am local time yesterday and was completed by noon without incident.
The pull-out of the garrison came as President George Bush paid a surprise visit to Iraq in a bid to bolster his case that the recent build-up of American troops has improved security in the country.
The 5,500-strong UK force remaining at the airbase will now have an "overwatch" role in the area, with the final handover of Basra province to Iraqi authorities due in the autumn, said the Ministry of Defence.
Basra will be the last of the four provinces in the UK sphere of operations in southern Iraq to be handed over to local authorities, following Dhi Qar, Muthanna and Maysan over the past 14 months.
Basra Palace was a key British base in the city following the 2003 war but has increasingly become a target for insurgent attacks. Iraqi flags were raised over the palace yesterday, as home-grown forces took control of the compound.
Mr Brown denied British troops had withdrawn in "defeat" and insisted the move to Basra Air Station was an "organised one".
He said UK forces in the area would retain the capacity to "re-intervene" in support of the Iraqi army, and would do so in "certain circumstances".
The move was part of a transition for British troops throughout Iraq to an "overwatch role", he added.
The overall number in the country would not fall for now, he said, allowing Britain to fulfil its duty to the Iraqi people.
"The numbers of troops are remaining roughly the same at this moment and we are staying to discharge our obligations to the Iraqi people an the international community," Mr Brown said.
The Prime Minister has come under increasing pressure to announce a timetable for the complete withdrawal of UK troops from Iraq, but has refused to do so. Yesterday's events will fuel speculation that a large-scale pull-out is imminent.
Brigadier James Bashall, second in command of British forces in Basra, told the BBC: "The handover of Basra Palace represents a significant step along the road to provincial Iraqi control.
"I think we are going in the right direction and we will make another judgment in the autumn to see if the decision is right to hand over completely to the Iraqis."
He said British troops were in a position to go back into the city if required, adding: "UK forces still retain security responsibility and we are prepared ... to go back in and assist the Iraqis should we be asked to do so."
The security situation will be watched closely in the coming weeks, amid fears of violence between Shia militias vying for control of Iraq's second city.
US Army commanders have been quoted as saying they are "surprised" by the move from the palace base.
But Foreign Secretary David Miliband said: "Our decisions in Basra reflect the situation on the ground, above all the growing capacity of the Iraqi security forces, and are signed off by the coalition and the Iraqi Government."
The 5,500 UK forces left in Iraq will retain security responsibility for Basra from their base at Basra Air Station until control of the province is handed over to the Iraqi army in the autumn, the MoD said.
Meanwhile, British troops will provide further training to Iraqi soldiers in preparation.
Mr Brown admitted the post-war situation in Iraq "could have been done a lot better and should have been done a lot better".
He was speaking after former British Army chief General Sir Mike Jackson branded the US approach to the post-war reconstruction of Iraq "intellectually bankrupt".
Mr Brown said: "General Jackson is a very brave soldier, I have got great admiration for him. He did not say this to me at the time."