"The situation on the ground, I think, makes it likely that General (David) Petraeus will be able to decide to bring out the first five teams by July," Gates told an end of year press conference.

"The first of those is coming out this month. My hope has been that the circumstances on the ground will continue to improve," he added.

The challenge for next year, Gates said, would be "to sustain the gains we have achieved."

There are currently about 160,000 US troops in Iraq fighting a fierce insurgency launched in the wake of the March 2003 US-led invasion.

About 30,000 extra troops were sent in during the year in a bid to quell the violence as part of a controversial "surge" strategy laid out by President George W. Bush and the US commander in Iraq, General Petraeus.

According to a Pentagon report released on Tuesday, the surge has been working, with US forces achieving "significant security progress" in Iraq over the past three months with the number of attacks down 62 percent.

"Improved security is beginning to achieve momentum that, if maintained, may lead to sustained stability," it said.

The Pentagon attributed the progress to the "surge" which began in early 2007, as well as the increasing efficiency of Iraqi security forces and the new US policy to mobilize Sunni tribes against Al-Qaeda forces.

Yet "more needs to be done to foster national, 'top-down' reconciliation to sustain the gains," the report said.

The projected withdrawal of five units by July would bring the number of US troops in Iraq down to about 130,000.

Gates said Friday that he hoped the improving security in Iraq would allow "drawdowns at roughly the same pace as the first half of the year," but that it would depend on the situation on the ground.

If the withdrawals continue apace then by the end of the administration of President George W. Bush in January 2009, some 10 brigades will have left Iraq, he said. That figure would correspond to roughly 100,000 troops.

Diplomats and military analysts however remain cautious, saying the drop in attacks and sectarian violence will remain fragile if core questions such as sharing oil revenues and rehabilitating former members of Saddam Hussein's Baath Party are not resolved.

Asked whether Iraqi leaders could carry out the necessary reforms, Gates said they "are committed to getting it done. We'll see if they get it done."

Turning to Afghanistan, which has just lived through its bloodiest year since the ousting of the Taliban in 2001, Gates said the country was still threatened by militants and drug-traffickers.

"Right now, at least, there is no question that some of the areas in the frontier area (with Pakistan) have become areas where Al-Qaeda has reestablished itself," he said.

But, he said, the number of fighters crossing the border in the east appeared to have fallen by some 40 percent.

"Al Qaeda right now seems ... to have turned its face toward Pakistan. Attacks on Pakistan have increased."

Gates also had harsh words for the US Congress, which this week passed a 2008 budget bill for some 555 billion dollars, including 70 billion dollars to fund the wars in Iraq and Afghanistan -- less than half Bush had asked for.

"Funding the war in fits and starts is requiring us to make short-term plans and short-term decisions" and may undermine the war effort, Gates warned.

The US defense secretary also renewed a plea for NATO members to contribute to the international forces on the ground by sending troops and trainers to help the Afghan security forces, saying some 7,500 extra men were needed.

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