Army to cut 5500 soldiers in Ulster.
Army observation posts, including one in Gerry Adams's own constituency in Belfast, will be closed and police stations defortified.
The Government will also repeal counter-terror laws which are specific to Ulster.
The moves to 'normalise' security and reduce the Army presence are a response to the IRA giving up terrorism.
But furious unionists warned the rush to demilitarise would delay devolution.
Democratic Unionist leader Ian Paisley said: 'We are appalled at the dishonest and dangerous approach of the Government and we want to make it clear that it will pay a high price for the approach that is being taken.'
But Northern Ireland Secretary Peter Hain said demilitarisation was crucial to winning trust.
He said: 'My first and over-riding priority, and that of the chief constable and the Army GOC, is the safety and security of the people of Northern Ireland.'
Hain added: 'We have to get acceptance by the republican community that the old days of the police being the enemy are over. The same goes for loyalist areas.'
Sinn Fein's Conor Murphy welcomed the operation.He said: 'It is for all our benefits, unionists as well as nationalists and republicans, to see society here demilitarised.'
Under the two-year plan, the Ulster-based battalions of the Royal Irish Regiment, numbering 3000 troops, will be disbanded