"We have now been in Afghanistan longer than many Americans expected," Obama said in the White House Rose Garden. "Now we're finishing the job we've started."
He said the current 32,000-strong US deployment in Afghanistan will be reduced to around 9,800 by the start of 2015. The number would be further halved by the end of 2015 before eventually being scaled back to a normal embassy presence with a security assistance component by the end of 2016.
However, any US troop presence in Afghanistan after 2014 is subject to signing of the Bilateral Security Agreement (BSA) by the new Afghan president.
Afghan President Hamid Karzai has refused to authorise the BSA, that should be signed by Karzai's successor to become effective.
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Both Ashraf Ghani and Abdullah Abdullah - the two candidates in a June runoff election to become the next Afghan president - have recently reiterated their intentions to sign the agreement quickly if elected.
"The bottom line is, it's time to turn the page on more than a decade in which so much of our foreign policy was focused on the wars in Afghanistan and Iraq," Obama said.
His announcement came a day after his unannounced trip to Afghanistan on the eve of the memorial day, as he said "future of Afghanistan must be decided by Afghans themselves".
"We have to recognise Afghanistan will not be a perfect place," he said. "And it is not America's responsibility to make it one. The future of Afghanistan must be decided by Afghans.