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The decision to reduce the US deployment to Germany comes amid a row between the two allies over Iran.
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The decision comes a day after Trump criticised Merz, who suggested the US had been "humiliated" by Iranian negotiators.
In social media posts on Thursday, Trump said Merz was "doing a terrible job" and had "problems of all kinds", including on immigration and energy. Trump has also suggested pulling US troops from Italy and Spain.
The US has a significant military presence in Germany, with more than 36,000 active duty troops assigned to bases across the country as of last December.
In a statement, Pentagon spokesman Sean Parnell said the order had come from Defence Secretary Pete Hegseth.
"This decision follows a thorough review of the Department's force posture in Europe and is in recognition of theater requirements and conditions on the ground," he said.
"We expect the withdrawal to be completed over the next six to twelve months."
Trump, a longtime critic of the Nato alliance, has been lashing out at allies over their refusal to participate in operations to reopen the Strait of Hormuz.
Asked on Thursday whether he would also consider pulling US troops from Italy and Spain, Trump responded: "I probably will - look, why shouldn't I?"
"Italy has not been of any help to us and Spain has been horrible," he added, criticising them for their response to the war in Iran.
"In all cases they said, 'I don't want to get involved.'"
Merz told university students earlier this week that "the Americans clearly have no strategy" and he could not see "what strategic exit" they might choose.
"The Iranians are obviously very skilled at negotiating, or rather, very skilful at not negotiating, letting the Americans travel to Islamabad and then leave again without any result," he said.
He added that the "entire nation" was being "humiliated" by the Iranian leadership.
In response, Trump took to his pla
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