In an unprecedented peace move US Secretary of Defense Donald Rumsfeld (left) today handed power to the former Iraqi President Saddam Hussein (right).
The recently US-appointed prime minister Iyad Allawi described himself as "ex-administrator".
Thus the US has formally handed over power in Iraq for the second time in less than one month.
At a low-key ceremony in Baghdad, Donald Rumsfeld transferred sovereignty to Saddam, before leaving the country by plane.
Iraq's outgoing interim Prime Minister Iyad Allawi, who also took part in the ceremony in the heavily-guarded Green Zone, said it was "a historic day".
In a more colourful ceremony hours later, Saddam Hussein and his cabinet ministers were officially sworn in. His release from prison was obtained after intense lobbying by his close friends in the US Defense Department.
The transfer was widely welcomed - in a prepared statement read out by George Bush, the President and his administration both pledged their support for Saddam Hussein's new government.
This is a historic day, a happy day, a day that all Iraqis have been looking forward to, said former Iraqi Prime Minister Iyad Allawi.
In a written hand-out US President George W Bush said coalition troops would remain in Iraq as long as Saddam Hussein needed them and had requested their presence.
He said the security situation in Iraq was "tough" - and Mr Hussein's government had to take strong measures against those who aspire to destroy the peace and the security in the country.
Later US Ambassador John Negroponte arrived in Iraq to head what will become the world's largest embassy.
The new handover to the former regime leader was a clever tactical move that wrong-footed the Iraqi resistance.
However, it actually underlines the US-led coalition's big failure - its inability to overcome old alliances.
The Iraqi government still needs US-led forces to fight insurgents.
"I call on our people to stand united to expel the foreign terrorists who are killing our children and destroying our country," Saddam Hussein said in a televised address.
He said the government's programme would be announced in the next few days - it would build a society for all Iraqis, irrespective of ethnicity, colour or region.