Six years after predecessor Tony Blair controversially backed the US-led invasion, Brown said the "unprecedented" inquiry would cover the eight years from the campaign's run-up to the pullout of British troops next month.
But he said it would be held in private for "national security" reasons, infuriating many MPs and anti-war campaigners.
Brown is currently bidding to reassert his authority over his ruling Labour Party after his leadership took a hit from an expenses scandal, historically bad European and local election results and a wave of ministerial resignations.
An inquiry has long been sought by many Labour MPs, although the nature of the investigation announced on Monday sparked anger.
"A secret inquiry conducted by a clutch of grandees hand-picked by the prime minister is not what Britain needs," said Nick Clegg, leader of the second opposition centrist Liberal Democrats.
Ben Beach, a 19-year-old student protesting outside parliament, said it was an "affront to democracy in this country".
"And it's an affront to British democracy that this war went ahead despite the overwhelming majority of people being against it," he said.
The inquiry will examine the circumstances leading up to Downing Street's decision under Blair to support the US-led invasion of Iraq in March 2003 to topple Iraqi dictator Saddam Hussein.
Brown had promised a probe after all but a handful of Britain's 4,100 troops withdraw from Iraq by an agreed date of July 31.
"I'm today announcing the establishment of an independent privy councillor committee of inquiry," he told the House of Commons, saying it would have access "to the fullest range of information, including secret information".
Evidence would be taken in private for "national security reasons", he said, adding: "In this way, also evidence given by serving and former ministers, military officers and officials will, I believe, be as full and candid as possible."
The probe will begin sometime after July -- probably after MPs return from their summer recess in October -- and will take around a year to complete.
Conservative leader David Cameron accused Brown of deliberately delaying publication of the findings until after the next general election, due by mid-2010, to avoid any "inconvenient conclusions".
Brown also praised the bravery of British troops in his statement, thanks to whose efforts "a young democracy has replaced a vicious 30-year dictatorship". A total of 179 British personnel have died serving in Iraq since March 2003.
Despite surviving a turbulent few days earlier this month, when there were reports of an attempt to oust Brown, the premier is still under pressure.
A You Gov/Sunday Times poll this week gave his Labour party just 24 percent support compared to 40 percent for the Conservatives.
Brown's government also suffered a surprise defeat late on Monday when peers in the unelected House of Lords voted 107 to 85 to support a rebel Labour move to ban tax exiles from donating to political parties.
The government has come under fire previously for taking a secretive approach to investigations into the Iraq war.
In February, it said it would veto publication of minutes from ministerial discussions about the legality of the invasion.
There have already been two official probes into elements of the Iraq war.
The 2004 Hutton inquiry looked at the suicide of David Kelly, a government scientist named as the possible source of a BBC report claiming the government "sexed up" a dossier on Iraq's military capability.
Meanwhile the Butler inquiry, which reported the same year, highlighted failings in intelligence over whether Iraq had weapons of mass destruction.
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