President Bush has said the drop in violence in Iraq is a sign of the "durability" of progress but warned that gains made could be reversed.
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Meanwhile influential Shia cleric Moqtada Sadr has again appealed to the Iraqi government not to sign a new security deal with the US.
The deal would replace the UN mandate which runs out at the end of the year.
Mr Bush told reporters outside the Oval Office that violence in Iraq had fallen to its to lowest level since spring 2004 and that "extremists who once terrified citizens have been driven from their strongholds".
He said there was a "degree of durability" to the gains made by US and Iraqi forces which was due to the recent surge in US troop numbers and the "increasing capability of Iraqi forces".
But he added that the chief US officials in Iraq, Gen David Petraeus and US Ambassador Ryan Crocker "caution that the progress is still reversible".
Security improvements have allowed for a reduction in US tours of duty from 15 months to one year, which Mr Bush said would "ease the burden on our forces and will make life easier for our wonderful military families".
Talks continue
The president praised the Iraqi government for making political process on major pieces of legislation and in preparations for provincial elections.
He said Iraqi troops would continue to take the lead in more military operations across the country.
Mr Bush also said that the US and Iraqi governments were "making progress" on a deal to provide a legal basis for US troops to remain in Iraq once the UN mandate expires at the end of the year.
The self-imposed deadline for the agreement was 31 July but US officials said last week that it was unlikely to be met.
Mr Sadr, who ordered a ceasefire from his supporters in the Mehdi Army in May, has said that Iraqis should oppose any agreement.
Mr Bush's statement came as some 50,000 members of the American-backed Iraqi security forces continued a big operation against Sunni militants said to be linked to al-Qaeda in the province of Diyala, north-east of Baghdad.
They are reported to have made dozens of arrests since the offensive began on Tuesday.
(BBC)
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