Iraq's national security adviser, Mouwaffak al-Rubaie, had taken a firm stance against the group during a visit to Iran this week, saying its members had two months to return to Iran or move to a third country.
Al-Dabbagh tempered the rhetoric but said the ultimate goal was for the group to leave Iraq.
"The Iraqi government is not going to force this organization against its will (and) is not going to deport them to Iran," al-Dabbagh told Associated Press Television News.
But, he said the group "is not wanted," in Iraq and must "find a third country to move to."
Iraq's Shiite-led government has long sought to get rid of the People's Mujahedeen, which fought alongside Saddam Hussein's forces during the 1980-88 Iran-Iraq war. At the same time, many Iraqi Shiites fled to Shiite-dominated Iran and fought against Iraq.
Saddam allowed the Iranian exiles to establish a base north of Baghdad in 1986 to launch raids into Iran. But U.S. troops disarmed the fighters and confined them to Camp Ashraf after the 2003 invasion of Iraq.
The United States considers the group a terrorist organization but wants its members to be treated humanely and not forced back to Iran where they could face danger.
The People's Mujahedeen has expressed fear that it would be forcibly evicted after the Iraqi government took over responsibility for Camp Ashraf on Jan. 1 under a new security agreement with the United States. The U.S. military maintains a presence at the camp.
"Iraq is not the choice for them," al-Dabbagh added. "We are going to deal with them in all humanitarian ways ... but they have to find out a third country in order to move to."
He did not elaborate or give a timeframe.