(Adds Ministry of Defence statement)

By Aref Mohammed

BASRA, Iraq, Sept 2 (Reuters) - British troops were quitting the southern Iraqi city of Basra on Sunday night in another step towards handing over the province to Iraqi control and paving the way for an eventual withdrawal of British forces from Iraq.

A British Ministry of Defence source in London said troops were pulling out of Basra Palace, which was built for Saddam Hussein, in the city centre and withdrawing to the vast British airbase on the outskirts of the city.

"The troops are coming out," the source said.

In a statement, the ministry said that handing over the palace "has long been our intention".

"We expect the handover to occur in the next few days," it said, adding that British forces would retain overall security responsibility for Basra until the handover to provincial Iraqi control, expected towards the end of the year.

British military officials in Basra declined to comment but a source at the Iraqi Defence Ministry in the city said Iraqi troops were now inside the palace.

One Reuters witness said he could see helicopters taking off and landing at the palace.

The withdrawal would bring an end to the British presence in the volatile city for the first time since the U.S.-led invasion that toppled Saddam Hussein in 2003.

The British Ministry of Defence said that British troops would continue to train and support Iraqi security forces there.

Britain has already handed over three other provinces in southern Iraq to Iraqi authorities amid a surge in attacks that have claimed the lives of 41 British soldiers this year -- the highest number of casualties suffered by the British since the first year of the war.

Basra, Iraq's second largest city, is strategically vital as the hub of southern oil fields that produce nearly all of the government's revenue, and the centre of imports and exports through the Gulf.

It has witnessed a turf war between rival Shi'ite groups, including supporters of fiery cleric Moqtada al-Sadr, the Supreme Iraqi Islamic Council and smaller Fadhila party, mainly for political supremacy and control of illegal oil traffic.

While residents say there is now a fragile calm between the rival groups, there are fears that the British withdrawal will be accompanied by an upsurge in factional violence.

Some 500 troops had been based at the palace, which was bombarded daily by mortar and rocket fire.

The withdrawal from the palace will lead to the reduction in the number of British soldiers in Iraq to about 5,000. All are based at the airbase, which is also attacked daily.

CIVIL WAR

In Baghdad, Prime Minister Nuri al-Maliki responded to critics in the U.S. Congress, saying his government had kept Iraq from plunging into sectarian civil war.

Maliki told a news conference his critics had crossed what he called a "reasonable line" and were encouraging militants trying to destabilise Iraq.

Democratic presidential hopeful Senator Hillary Clinton and other U.S. lawmakers have called for Iraq's parliament to replace Maliki, a Shi'ite Islamist.

"They do not realise the size of the disaster that Iraq has passed through and the big role of this government, a government of national unity. The most important achievement is it stopped a sectarian and civil war," Maliki said.

His comments came just over a week before U.S. President George W. Bush's top officials in Iraq present pivotal reports on the country's security and political situation.

Maliki said he did not want to prejudge the testimony by U.S. commander, General David Petraeus, and Ambassador Ryan Crocker, which is to be delivered to Congress on Sept. 10.

He is under mounting pressure from officials in Washington to show progress towards reconciling warring majority Shi'ite Muslims and minority Sunni Arabs.

Tens of thousands of Iraqis have been killed since the bombing of a revered Shi'ite shrine in the town of Samarra in February 2006 unleashed a wave of sectarian bloodshed that pushed the country to the brink of all-out civil war.

Democrats in Congress have criticised Bush's Iraq policy and along with some senior Republicans have called for U.S. troops to begin pulling out as soon as possible.

(Additional reporting by Adrian Croft in London)

AlertNet news is provided by