Mr. Bush's decisions virtually guarantee a major U.S. presence in Iraq throughout his term in office in January, when a new president takes office.
In another major decision, the president announced he will seek to relieve the heavy strain on the Army by reducing the length of combat tours in Iraq and Afghanistan to 12 months, down from the current level of 15 months. He said the change would take effect on Aug. 1, and would not affect U.S. forces already deployed on the front lines.
White House Press Secretary Dana Perino said that the president hopes the plan will help deal with "stress issues" for troops and their families, reports CBS News correspondent Peter Maer.
Mr. Bush said U.S. forces have made major gains since he ordered a buildup of about 30,000 U.S. forces last year. "We have renewed and revived the prospect of success" the president said.
Mr. Bush delivered his remarks in the Cross Hall of the White House before an audience of veterans' service groups and Vice President Dick Cheney, Defense Secretary Robert Gates and Secretary of State Condoleezza Rice.
The president's decision had been foreshadowed by two days of testimony before a skeptical Congress by Petraeus and Ryan Crocker, the U.S. ambassador to Baghdad. Now in its sixth year, the war has claimed the lives of more than 4,000 U.S. troops and cost more than $500 billion.
Iraq and the sagging economy have taken a heavy toll on Mr. Bush. His job approval rating has fallen to just 28 percent, a new low in the Associated Press-Ipsos poll.
Mr. Bush said the United States would proceed with planned drawdowns of U.S. forces, bringing home the 30,000 troops he sent to Iraq last year to combat sectarian violence. The additional troops were also intended to help restore basic security and provide a sense of calm to allow Iraqi leaders to attempt to achieve political reconciliation.
"I've told him (Petraeus) he'll have all the time he needs," Mr. Bush said. "Some have suggested that this period of evaluation will be a pause. That's misleading, because none of our operations in Iraq will be on hold. Instead we will use the months ahead to take advantage of the opportunities created by the surge and continue operations across the board."
While acknowledging that "serious and complex problems remain in Iraq," Mr. Bush said that "a major strategic shift" has occurred since the buildup.
"Today we have the initiative," the president said.
Mr. Bush also called on Congress to send him a spending bill for Iraq that does not include any timetables for troop withdrawals or exceed the $108 billion he has requested. Last spring, Congress added $17 billion in unrequested domestic add-ons such as children's health care, homeland security and heating subsidies.
Now, Democrats are eyeing using this year's war funding bill to stimulate the economy with road-building funds, additional unemployment benefits, a summer jobs program and additional food stamp benefits. The measure is slated to advance later this spring.
Mr. Bush said he would veto the spending measure if Congress fails to meet his conditions.
"While this war is difficult, it is not endless," Mr. Bush said in a message directed to troops, but surely to the American public as well.
The president said that only as conditions in Iraq improve will he bring more troops home, a policy he calls "return on success."
"The day will come when Iraq is a capable partner of the United States," Mr. Bush said. "The day will come when Iraq's a stable democracy that helps fight our common enemies and promote our common interests in the Middle East."
"And when that day arrives, you'll come home with pride in your success," Mr. Bush said to the military and U.S. civilians in Iraq.
Mr. Bush used his speech to challenge Iran anew. He said the regime in Tehran has a choice to make: live in peace with its neighbor, or continue to fund and train militant groups that terrorize Iraqi people - charges that the Tehran government denies.
"If Iran makes the right choice, America will encourage a peaceful relationship between Iran and Iraq," Mr. Bush said. "Iran makes the wrong choice, America will act to protect our interests, and our troops, and our Iraqi partners."
After his remarks, Mr. Bush boarded a helicopter on the South Lawn to begin a journey to Texas for a weekend at his ranch.
In remarks prepared for a Senate hearing later on Thursday, Gates said he and the senior military leadership at the Pentagon "concur with the course the president has chosen in Iraq."
"I do not anticipate this period of review to be an extended one, and I would emphasize that the hope is, conditions on the ground will allow us to reduce our presence further this fall," Gates said. "But we must be realistic. The security situation in Iraq remains fragile and gains can be reversed."
Even before Mr. Bush made his announcement, war critics went on the attack.
"We are six years into a war that has claimed more than 4,000 American lives ... cost nearly a trillion dollars that could have been used to meet urgent needs at home and damaged the reputation of the United States in the eyes of the world," House Speaker Nancy Pelosi wrote to Mr. Bush in a letter she released late Wednesday. "General Petraeus admitted on Tuesday that `we haven't turned any corners, we haven't seen any lights at the end of the tunnel' in Iraq.
"The American people are entitled to know when they will receive a more hopeful report than the one provided by General Petraeus, and what changes in policy you will make to achieve it before you leave office," Pelosi, D-Calif., said.
She added that Mr. Bush needs to tell the American people how keeping 140,000 troops in Iraq will help reduce the threat the nation faces because the U.S. military is bogged down in Iraq, what conditions will be needed for further troop withdrawals beyond July and how much longer the threat from extremists hiding along the Pakistan-Afghanistan border will be allowed to "grow because our resource commitment in Iraq makes is impossible to respond adequately."