BAGHDAD (Reuters) - The U.S. military took a step toward pulling combat troops from Iraqi cities on Saturday, moving out of a Baghdad base that Iraqi officials said would be dismantled and converted back into a shopping mall.

Iraqi soldiers unfurl their national flag to take part in a rehearsal for the Iraqi Army Day 88th anniversary celebration, in Baghdad's fortified Green Zone January 3, 2009. On Thursday, U.S. forces handed over responsibility to Iraqi troops for the Green Zone, a fortified swathe of central Baghdad off limits to most Iraqis, who widely view it as a symbol of foreign military occupation. REUTERS/Erik de Castro

It was the first U.S. military base to be handed over to Iraq since U.S. forces came under Iraqi authority on January 1 in step with a new bilateral security pact.

The pact, which replaced a U.N. mandate, requires Iraqi authorization for U.S. military operations, gives U.S. forces until mid-2009 to pull combat troops out of Iraq’s towns and cities, and until 2011 to withdraw completely.

Brigadier-General Robin Swan, deputy commander of U.S. forces in Baghdad, said the handover of Forward Operating Base Callahan in northern Baghdad was “tremendously significant.”

“By June 30th, combat formations are out of the cities. This was a major forward operating base, with 600 soldiers ... three short weeks ago,” he told Reuters.

DECAYED

U.S. forces set up the base in March 2007 around an abandoned shopping center, now decayed and riddled with bullet holes, in a bid to repel Shi’ite militias from the largely Sunni Adhamiya district. It has been quiet for months.

Lieutenant-Colonel Michael Pappal, who heads the base, handed a giant key to Hadi Jadoo, a trade ministry official, as Iraqi army snipers watched from the roof.

“After long suffering, we can now develop this area. We are rid of terrorists,” said Hadi Hassan, who will manage the mall.

The transfer of the base came two days after U.S. forces handed over control of the Green Zone, a fortified swathe of central Baghdad, to Iraq in a step that reflects the narrowing of U.S. operations and improving security across Iraq.

Swan said the base handover was the beginning of a wider pullout. A much larger base in nearby Rostumiya neighborhood would be closed completely by the end of March, he said.

Similar Baghdad bases, like Loyalty and War Eagle, are to be reduced in size and turned into joint Iraq-U.S. security stations soon, he added.

“It’s all a re-adjustment of our footprint,” Swan said.

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How many U.S. troops will remain at joint urban bases after June, and what their activities will be, remains unclear, especially as U.S. military commanders race to ensure Iraq’s maturing army is ready to hold together a fragile calm.

U.S. officials have said combat troops may be retasked to support and advise Iraqi soldiers at joint urban bases.

Violence has fallen across Iraq and few cities have seen as dramatic a turnaround as Baghdad, which a year ago was ravaged by sectarian conflict that left bodies piling up in the streets -- although militants still regularly stage lethal bomb attacks.

Iraqi officials said the handover of the base, known by Iraqis as Sha’ab market, signaled a return to normality.

“We are going to rebuild it for the Iraqi people. It will sell everything they need, clothes, car parts, food, just like before the war,” Jadoo told Reuters.