America appeared to bow to demands by Baghdad about the future status of its troops in Iraq yesterday, apparently agreeing that they must leave the country in three years’ time and could face prosecution in an Iraqi court if they broke the law.

According to US and Iraqi officials, negotiators from the two sides have agreed the wording of a draft document that will redefine radically the relationship between the 150,000 US forces and their Iraqi hosts.

The deal, yet to be approved by Iraqi leaders, the Cabinet and parliament, must be in place by December 31, when the existing UN Security Council mandate expires.

An agreement between the two sides would open the way for a separate arrangement to allow 4,000 British Forces and other smaller coalition members to remain in Iraq.

The US State Department confirmed that a “text” was being considered but that it was not finalised. “Nothing is done until everything is done. Everything isn’t done,” a spokesman said. “The Iraqis are still talking among themselves. We are still talking to the Iraqis. The process is not complete.”

The document stipulates that US forces must be out of Iraqi cities by mid-2009 and leave the country altogether by the end of 2011, unless the Iraqis ask them to stay. “The withdrawal will be achieved in three years,” Ali al-Dabbagh, the Iraqi government spokesman, said. “In 2011 the government at that time will determine whether it needs a new pact or not, and what type of pact will depend on the challenges it faces.”

By far the most contentious issue is the question of immunity, which American forces and Pentagon civilian contractors currently enjoy. Mr al-Dabbagh said that from January 1 Iraq would be able to prosecute US troops if they committed crimes outside their bases while off duty or on unauthorised missions. They could be held under US custody but would have to appear for questioning by Iraqi investigators and for trial in an Iraqi court.

Iraqis have been enraged by a series of atrocities committed by US forces, who in their eyes appeared to get away with murder. In the most notorious case a 14-year-old girl was raped and killed by US paratroopers and three members of her family murdered in Mahmoudiya, south of Baghdad. Four soldiers have pleaded guilty in a US court and a fifth, Steven Dale Green, is due to stand trial next year.

If a deal is not in place by the end of the year, US forces would have no legal status and would be confined to barracks until they could be withdrawn. The other alternative is simply to roll over the UN Security Council resolution, though Washington is concerned that a more assertive Russia could wield its veto to block the move.

While an agreement now seems more likely, it is by no means sure. Hardline Iraqi Sunni and Shia Muslim groups, who want all foreign forces out of the country immediately, are expected to vote against the agreement. Iran, which wields considerable influence in Iraq, is also lobbying hard for a “no” vote.

The new agreement reflects the increasingly prominent role played by the 600,000 Iraqi soldiers and police in securing their country. However, American firepower, particularly in the air, remains a decisive weapon in the battle against the insurgency.

Yesterday US forces claimed to have killed Abu Qaswarah, a Moroccan national and al-Qaeda’s second in command in Iraq, after a raid on a house in the northern city of Mosul.

Later the Swedish police said that a Swedish man of Moroccan origin, who had links to al-Qaeda’s leadership, was also killed in northern Iraq in a firefight with American forces.

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