Legal documents transferring sovereignty were handed over by U.S. governor L. Paul Bremer to chief justice Midhat al-Mahmood in a small ceremony in the heavily guarded Green Zone. Bremer took charge in Iraq about a year ago.
"This is a historical day ... a day that all Iraqis have been looking forward to," said Iraqi President Ghazi Al-Yawer. "This is a day we are going to take our country back into the international forum."
Militants had conducted a campaign of car bombings, kidnappings and other violence that killed hundreds of Iraqis in recent weeks and was designed to disrupt the transfer, announced by the Bush administration late last year. Intially, the Americans were thought to have planned for about one more year of occupation.
The response in Baghdad was mixed.
"Iraqis are happy inside, but their happiness is marred by fear and melancholy," said artist Qassim al-Sabti. "Of course I feel I'm still occupied. You can't find anywhere in the world people who would accept occupation. America these days, is like death. Nobody can escape from it."
Two hours after the ceremony Bremer left Iraq on a U.S. Air Force C-130, said Robert Tappan, an official of the former coalition occupation authority. Bremer was accompanied by coalition spokesman Dan Senor and close members of his staff. Bremer's destination was not given, but an aide said he was "going home."
The new interim government was sworn in six hours after the handover ceremony, which Western governments largely hailed as a necessary next step. The Arab world voiced cautious optimism, but maintained calls for the U.S. military to leave the country quickly.
Allawi delivered a sweeping speech sketching out some of his goals for the country, urging people not to be afraid of the "outlaws" fighting against "Islam and Muslims," assuring them that "God is with us."
"I warn the forces of terror once again," he said. "We will not forget who stood with us and against us in this crisis."
Members of Allawi's Cabinet each stepped forward to place their right hand on the Quran and pledged to accept their new duties with sincerity and impartiality. Behind them, a bank of Iraqi flags lined the podium.
"Before us is a challenge and a burden and we ask God almighty to give us the patience and guide us to take this country whose people deserves all goodness," said President Ghazi al-Yawer after taking his oath. "May God protect Iraq and its citizens."
The NATO alliance quickly said it would begin training the Iraqi military, which faces a daunting task in putting down the growing insurgency threatening the country.
President Bush marked the transfer with a whispered comment and a handshake with British Prime Minister Tony Blair, gathered with world leaders around a table at a NATO summit in Istanbul, Turkey.
Stealing a glance at his watch to make sure the transfer had occurred, Bush put his hand over his mouth to guard his remarks, leaned toward Blair and then reached out to shake hands. Defense Secretary Donald H. Rumsfeld, a row behind the president, beamed.
Bush was briefed Sunday that the Allawi government was ready to take power early.
The early transfer had been under discussion between Allawi and U.S. officials for at least a week, a senior administration official said, speaking on condition of anonymity.
Bremer's last moments in Iraq were spent in a meeting with Lt. Gen. Ricardo Sanchez, the top American commander in the country.
Although the interim government will have full sovereignty, it will operate under major restrictions some of them imposed at the urging of the influential Shiite clergy which sought to limit the powers of an unelected administration.
For example, the interim government will only hold power seven months until, as directed by a United Nations Security Council resolution, there must be elections "in no case later than" Jan. 31. The Americans will still hold responsibility for security. And the interim government will not be able to amend the interim constitution. That document outlines many civil liberties guarantees that would make problematic a declaration of emergency.
As Iraq's highest authority, Bremer had issued more than 100 orders and regulations, many of them Western-style laws governing everything from bankruptcy and traffic, to restrictions on child labor and copying movies.
Some are likely to be ignored. One law requires at least a month in jail for people caught driving without a license something many Iraqis do not have. Another demands that drivers stay in a single lane, a rule widely ignored in Iraq's chaotic streets.
Others are more controversial. On Saturday, Bremer signed an edict that gave U.S. and other Western civilian contractors immunity from Iraqi law while performing their jobs in Iraq. The idea outrages many Iraqis who said the law allows foreigners to act with impunity even after the occupation.
A Bremer elections law restricts certain candidates from running for office, banning parties with links to militias, for instance.
The Coalition Provisional Authority's laws remain in effect after the occupation ends unless rescinded or revised by the interim government, a task that another Bremer-signed law allows, but only after a difficult process.
The new government's major tasks will be to prepare for elections, handle the day-to-day running of the country and work along with the U.S.-led multinational force, which is responsible for security. The Iraqis can in principle ask the foreign troops to leave although that is unlikely.
However, the United States and its partners hoped that the transfer of sovereignty would serve as a psychological boost for Iraqis, who have been increasingly frustrated by and hostile to foreign military occupation. U.S. officials hope that Iraqis will believe that they are now in control of their country and that will take the steam out of the insurgency.
With the transfer, the Iraqis now face the daunting task of securing law and order with the help of about 135,000 U.S. troops and about 20,000 more from other coalition countries.
The handover ceremony took place in a formal room with Louis XIV furniture in an office in the building formerly used by the Iraqi Governing Council. Officials were seated in gilded chairs around a table, in the center of which was a bowl of flowers with a small Iraqi flag in it.
Just before the handover, everyone stood up, and documents were passed to the chief justice at 10:26 a.m. local time at that point, legal sovereignty was passed.
Brig. Gen. Mark Kimmitt, the coalition deputy operations chief, was the only U.S. military official present.
"We'd like to express our thanks to the coalition," al-Yawer said. "There is no way to turn back now."
Bremer, wearing a dark suit and a blue tie with small white dots, read the transfer document, which was inside a blue folder. With a laugh, he referred to himself as the "ex-administrator of the Coalition Provisional Authority."
Allawi stood on his right and al-Yawer on his left.
"The Iraqi government is determined to hold elections at the scheduled date, which is January next year," Allawi said in Arabic. He had told CBS television network that the election might be delayed if the security situation did not improve.
There was little initial public reaction to the near-secret transfer ceremony, which was broadcast on Iraqi and Arabic satellite television stations. There was no celebratory gunfire which rattles through Baghdad when Iraq's national soccer team defeats foreign clubs.
Workers were cleaning the area on Firdous Square where the statue of Saddam Hussein was hauled down on April 9, 2003, when Baghdad fell. More police were seen in the streets.
Coalition officials said Bush had already sent a letter to al-Yawer formally requesting diplomatic relations.