The council says its aims are to counter the effects of the credit crunch, to ensure this year's council tax rise is kept as low as possible and also to help the authority's ongoing drive to become more efficient.
Government under-funding of the national concessionary bus fare scheme leaving the council with a£3.7m shortfall is another major factor behind the post reduction.
IW Council chief executive Steve Beynon wrote to every staff member to explain the measure.
The council has pledged to consult fully with staff union Unison and to explore all opportunities to shed the jobs without the need for compulsory redundancies.
Included in the overall 205 figure is a number of posts that have already been lost through a recent restructuring of senior County Hall management and an ongoing review of staffing in the children's services directorate.
Approximately 70 of the posts are likely through the phased implementation of the Business Systems Improvement Programme over the next three years. BSCIP is a programme to improve efficiency by transforming the way in which the whole council manages its HR, Payroll, Finance and Procurement functions.
Mr Beynon said: "Whilst we have more work to do to finalise the details, it is looking likely that we will have to lose up to 135 posts across the authority in this financial year (including those already underway as a result of existing restructure programmes), with a further 70 posts likely following the phased implementation of the BSIP over the next three years.
"We fully intend to continue to manage this process as carefully as possible and to give support to staff, with compulsory redundancies being the last resort."