Prime Minister Fredrik Reinfeldt made the announcement in Stockholm after meeting with Iraqi Prime Minister Nouri al-Maliki Friday. Maliki took the occasion to urge Iraq refugees in Sweden to return home.
"More than anything, we want Iraqis to return. We want our country's talent and competence to return," he said.
The embassy is to open just outside the heavily armed Green Zone, near the Iraqi Foreign Ministry, the Swedish news agency said.
At present, Swedish ambassador Niclas Trouve lives in Jordan's capital city of Amman but frequently travels to Baghdad for work.