 Ethiopia's involvement is unpopular in Somalia |
"Starting today we will withdraw our forces from Mogadishu," Ethiopia General Suem Hagoss said at a ceremony where warlords surrendered their arms.
Ethiopian Prime Minister Meles Zenawi has told the BBC the withdrawal would take place in three stages.
The African Union is trying to set up a peacekeeping force to replace Ethiopia.
But so far, only Uganda and Malawi have publicly said they would send troops to Somalia.
The BBC's Mohammed Olad in Mogadishu says 200 Ethiopian troops were seen moving out of the airport with armoured vehicles.
General Hagoss said they were reducing the number of forces in the country, but was not specific on how many soldiers will be moving out before AU peacekeepers are deployed.
"The heroic army of Ethiopia supported the transitional government to restore normality to the country after 16 years of violence," Somali deputy Prime Minister Hussein Mohamed Aidid told the AFP news agency.
"I thank the people and the government of Ethiopia on behalf of my government."
However, Ethiopia's intervention to help the government oust Islamists who had taken control of Mogadishu and much of southern Somalia was unpopular with many Somalis.
The two countries have fought several border wars in the past.
Islamist talks
In neighbouring Kenya, the authorities have confirmed that one of the Islamist leaders is in their custody.
Sheikh Sharif Sheikh Ahmed surrendered at the weekend and is under police guard in a top Nairobi hotel.
He is the most senior Union of Islamic Courts (UIC) official whose whereabouts are known after they were ousted. 
The US backed the drive against the UIC but has denied being involved in the questioning of Mr Ahmed.
But US ambassador to Kenya, Michael Ranneberger, who also covers Somalia is to speak to him this week, possibly on Tuesday, embassy spokesperson Jennifer Barnes told AFP.
"The ambassador will urge [Mr Ahmed] to counsel his supporters not to carry out violence and to support the development of an inclusive government," she said.
Mr Ranneberger has previously urged Somalia's president to try to include moderate Islamists, such as Mr Ahmed, in his government.
However, President Abdullahi Yusuf and other officials have publicly rejected such suggestions, accusing the UIC of having links to al-Qaeda.
UIC leaders have always denied such suggestions.
Meanwhile, at a meeting in Brussels, European Union foreign ministers said they were ready to offer financial support to the proposed peacekeeping force.
The ministers said a sustainable solution to the crisis could be reached, but that there were concerns about the reconciliation of the disparate Somali factions.
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