This new 40ha, $US600 million ($741million) compound, by far the largest US diplomatic presence anywhere in the world, is due to formally open in November, marking the beginning of a new chapter in US-Iraq relations. As America's $US700 billion war in Iraq finally begins to wind down, Washington's giant embassy in Baghdad will remain the most potent symbol of US power in Iraq.

In the next six months, America's imperial footprint in Baghdad will gradually shrink as thousands of its military and diplomatic personnel leave the vast, cool, cavernous comfort of Saddam Hussein's former presidential palace and hand over the building to the Maliki Government.

How far and how fast the formidable US military presence in the country will be reduced is the subject of intense debate between the US and Iraqi governments.

The UN mandate that governs the presence of the US-led multinational coalition in the country, including Australia, expires on December 31 and is unlikely to be renewed. The Maliki Government is keen to see an accelerated US troop draw-down in 2009 and a complete withdrawal of combat forces within three years. Notwithstanding a US-Iraqi agreement, Australia may also have to reach its own bilateral accord with Baghdad as to the future of its own military forces in the Iraqi capital, which include the 110-strong security detachment guarding our embassy.

For the US and Iraq, it is a deliberate and delicate strategic negotiation and a political balancing act.

The now more assertive Iraqi Government of Nouri al-Maliki wants to be in the driving seat when it comes to overseeing the country's still fragile internal security. But it also understands that a hasty, politically driven withdrawal of the 140,000 US troops stationed in Iraq could jeopardise big gains made in 2007-08. Having shed so much blood and treasure in Iraq, Washington wants to leave when it is confident the country is politically stable and the economy has been rebuilt.

When Inquirer spent 70 minutes talking with General David Petraeus in Baghdad last week, as the top US commander in Iraq he specifically declined to say that one of the US's longest wars could be over.

But Petraeus concedes it is encouraging to study the "metrics" and shows a swag of graphs and maps, all of which show how far Iraq has come in the past 12 months.

One of the most telling graphs, combined with data showing a dramatic drop in civilian and military deaths and a huge reduction in the level of ethno-sectarian violence in Baghdad, is the number of explosive caches found and cleared across Iraq.

According to coalition figures, 2690 caches were found in 2006, a total that climbed to 6956 last year. This year alone 6996 caches have been found, reflecting the accord between the Sunni-led Sons of Iraq and US forces that has led to security gains in provinces such as Anbar and a steady reduction in the threat posed by Al-Qa'ida in Iraq. Petraeus also points to the staggering number of Iraqis returning to their homes after being driven out by the bitter sectarian war and clashes with al-Qa'ida fighters that cleared out whole neighbourhoods in 2004-07.

He says al-Qa'ida in Iraq is still lethal but its presence in Baghdad is much reduced. The wide-scale intimidation practised by Shi'ite cleric Moqtada al-Sadr's Jaish al-Mahdi militia has been checked and JAM is still observing a cease-fire with coalition forces and the Maliki Government.

"Reconciliation is an endeavour done with one's enemies," Petraeus stresses. "You can't kill or capture your way out of this situation, It is too large. It is too complex. You have to reconcile with as many as you can."

On the economy, Petraeus says there has been significant progress. Oil production in the second quarter of this year has been the highest since pre-war levels. But electricity generation, while slowly rising, still does not remotely meet demand. In Baghdad, new investment is flowing into construction, including a new five-star hotel inside the international zone. There is even talk of a Disneyland south of the capital.

On Tuesday, the 55-year-old four-star general will finally hand over command of the US-led Multinational Force in Iraq to General Raymond Odierno. He will leave Baghdad to become America's CENTCOM commander - the key post charged with overseeing the Iraq and Afghanistan theatres - and a job he did not expect to get.

After spending almost 48 months on deployment in Iraq since 2003 - a record for any coalition commander - Petraeus is clearly tired but still running 9km three times a week and challenging soldiers a generation younger to push-up contests.

"I think you have to get into a battle rhythm and routine to avoid just being ground down by the tempo, by the daily pressures or emotions of the moment, and they can be substantial," Petraeus says.

"I have talked at times about Iraq being a roller-coaster existence. The roller-coaster hasn't been as extreme - touch wood - in recent months but there were periods when it was excruciatingly difficult and very, very, tough losses.

"There might be a perception that people may have that over time commanders get hardened to losses. I don't think that is the case. It certainly has not been the case for me.

"That is the part of the job that is the mostdifficult of all and certainly it never getseasier."

Asked if he is cautiously optimistic about Iraq's trajectory, Petraeus replies: "I am cautiously realistic. (US) ambassador (Ryan) Crocker and I decided we would eliminate the words optimist and pessimist from our vocabularies. We are realists. With a coldly realistic appraisal you clearly recognise that there has been considerable progress.

"I would not say that there has been what we call here 'irreversible momentum' established. There are still too many challenges. The structures are in some cases fragile. It has to be solidified."

But privately some of Petraeus's senior advisers, with other Coalition military planners in Baghdad, agree there is light at the end of the tunnel after 66 months of conflict.

Australia's military commander in the Middle East, Major General Mike Hindmarsh, concurs. "Compared (with) this time last year, it's extremely positive. They have made significant inroads there," he says of the US and Iraq army troop surge that took place under Petraeus's direction.

"All the statistics will tell you that things have changed and security is very good in Baghdad. On top of that, you have got a commander that really does get it from a counterinsurgency point of view."

US President George W. Bush this week publicly acknowledged the durable gains in Iraq and said Iraqi forces were increasingly capable of leading and winning the fight. Bush said that due to the surge's success, an additional 8000 US troops would be brought home by early 2009.

As Petraeus leaves Iraq he is already focusing on what be believes will be the "longest campaign of the long war": Afghanistan. Afghanistan, he says, will be enormously challenging. Managing the country's porous border with Pakistan is a substantial part of the problem.

Petraeus rejects any suggestion that the US Army is broken and exhausted after more than five years of war in Iraq. But he concedes there has been enormous strain on soldiers and families. "But I really do think that it (the US Army) is far and away the best force that we have ever fielded."

He says the advances in military hardware available to the US - including intelligence, surveillance and reconnaissance platforms, and artillery and precision-guided munitions - are also extraordinary.

"We've never had an army as experienced as this," Petraeus says. "Every other war that we've fought has generally been fought with a draftee army. We have learned an incredible amount (from Iraq). I mean we can fight. We can build. We can assist with local reconciliation. Doing it the way we have for so long just gives a reservoir of experience that has never, never been in our force in the past."

Patrick Walters, National security editor - Inquirer