Courses of action being considered include a phased withdrawal, the break-up of Iraq into a federal model and "one last push" -- a short-term injection of troops to create enough security to build confidence in the Iraqi government, the paper said.
The report comes as US President George W Bush was to meet US generals Saturday to discuss strategy amid a spike of violence in the troubled country that has seen 75 US troops killed in October alone.
The immediate withdrawal of coalition troops seems unlikely, the Guardian reported, quoting an unnamed Foreign Office diplomat saying: "We could pull out now and leave them to their fate but the place would implode."
An early exit would also constitute "an unpalatable humiliation" for the Bush administration, the paper added.
However, it did suggest that British forces in the area would likely be slashed by half in the middle of next year, followed by further reductions later.
A phased withdrawal is "still the likeliest option" but depends on Iraqi security forces becoming properly trained before it can happen, the paper said.
The option of holding talks with Iran and Syria received "virtual consensus" from a US Congress special commission headed by former secretary of state James Baker, which is set to report after congressional elections in November, the Guardian added.
It predicted that direct talks were unlikely but said: "The US could well give the nod to negotiations between a sovereign Iraq and its powerful neighbours."
A Foreign Office spokeswoman told AFP she would not speculate on the options being considered, adding: "There is no change in our policy but as you expect, we're continually looking at ways of achieving our goals."
She said she did not know if British officials were involved with the Baker discussions.

Copyright AFP (Agence France-Presse), 2006