The UK government had told a court that the dead were killed on the battlefield.
But it admits that it has failed to provide enough evidence of this to the court.
"(The government is proposing) an investigation of the murder of Iraqi detainees... and specific allegations by five Iraq nationals of ill-treatment."
It has been alleged that Iraqi civilians were detained following "the battle of Danny Boy" - a clash between British soldiers and Iraqis near the town of Al Majar-al-Kabir, in Maysan Province, on 14 May 2004.
Lawyers for five Iraqis have produced evidence supporting allegations the captives were taken to British base Camp Abu Naji, where they were tortured, murdered, and their bodies mutilated.