The troops will provide support and security for US personnel and the country's embassy in Baghdad.
"This force is deploying for the purpose of protecting US citizens and property, if necessary, and is equipped for combat," Obama said in a letter to legislators.
"This force will remain in Iraq until the security situation becomes such that it is no longer needed."
The president said he was notifying Congress under the War Powers Resolution.
The US was also considering drone strikes in Iraq and has sent more ships to the Persian Gulf, as the UN said it was pulling its staff out of Baghdad following lightning advances by the Sunni rebels.
John Kerry, the secretary of state, on Monday said drone strikes were "not the whole answer" to the Islamic State of Iraq and the Levant's campaign but added they could be "one of the options that are important".
"When you have people murdering, assassinating in these mass massacres, you have to stop that. And you do what you need to do if you need to try to stop it from the air or otherwise."
The UN meanwhile said it was pulling staff from Baghdad, with at least 58 already moved to Jordan. The organization planned to relocate others to Erbil, which is the capital of the semi-autonomous Kurdish region of Iraq.
James Bays, Al Jazeera's diplomatic correspondent, said the announcement came only a few days after the UN said it did not believe that Baghdad was at risk of attack by the ISIL.
Chuck Hagel, the US defense secretary, has also ordered the amphibious transport, the USS Mesa Verde, to the Persian Gulf.
The Mesa Verde can carry up to 800 Marines, their equipment and aircraft such as the Osprey helicopter / plane hybrid and Sea Knight helicopters.
John Kirby, the Pentagon's spokesman, said the Mesa Verde had already joined up with the carrier strike group led by the aircraft carrier, the USS George HW Bush.
US prepares for possible Iraq air strikes
AP news agency, citing three anonymous US officials, reported that the White House is considering sending a small number of US special forces into Iraq to slow down the rebel advance.
On Monday, ISIL terrorists captured Tal Afar, a strategic city along the highway to Syria, moving closer to their goal of linking areas under their control on both sides of the border.
A resident in Tal Afar, said that the rebels in pick-up trucks mounted with machine guns and flying black ISIL banners were on the streets, as gunfire rang out.
The fall of Tal Afar comes a week after the Al-Qaeda-linked militants captured Iraq's second-largest city, Mosul, and Tikrit.
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