"Due to the deteriorating security situation, a number of Australian officials have been withdrawn from Baghdad," the Department of Foreign Affairs and Trade said.
"The Australian Embassy remains open with reduced staffing levels," it said without providing figures.
"Australians in Iraq should depart immediately while commercial flights continue to operate."
Iraq said yesterday it had started to drive back fighters from the Islamic State of Iraq and the Levant, as grisly reports emerged of atrocities committed during their lightning offensive south towards Baghdad.
Australian Foreign Minister Julie Bishop said an "essential core" of embassy staff will remain in Baghdad.
"But we certainly strongly support the Iraqi government's ongoing efforts to counter this terrorism that's taking place within its borders.