Palestinian security forces have fanned out through the West Bank town of Bethlehem after Israeli troops pulled out and handed over control to them.
Palestinian security forces are meant to prevent militant attacks
Bells sounded from Bethlehem's ancient churches, and cheering residents applauded members of the security forces as they marched and drove into town.
Blue-uniformed police armed with assault rifles and handguns took up position at road junctions and began directing traffic, some waving Palestinian flags.
US President George W Bush praised Israel's withdrawal in a phone call with Israeli Prime Minister Ariel Sharon, White House spokesman Michael Anton said.
"The president commended Prime Minister Sharon for it [the withdrawal]," he said.
The security handover follows Tuesday's talks between Mr Sharon and his Palestinian counterpart Mahmoud Abbas, during which agreement was reached to press ahead with the US-brokered international peace plan known as the roadmap.
The plan requires that Palestinian police take over from withdrawing Israeli forces and stamp out any anti-Israeli militant attacks.
The US has announced a $30m aid package to the Palestinian Authority to help rebuild infrastructure destroyed during Israeli incursions into the West Bank and Gaza Strip.
This resumption of direct US economic aid comes after years in which Washington only provided assistance to the Palestinians through the UN and private groups.
The BBC's Barbara Plett in Bethlehem says residents have responded positively to the return of Palestinian national symbols to the town, but are under no illusions that this spells an end to Israeli occupation.
Travel into and out of Bethlehem will continue to be restricted by Israeli forces, who have remained in position outside the town.
Grandmother Hilal Murra called out "welcome, welcome" to members of the police, adding "It's better to see them in the streets than the Israelis".
But another resident said the handover might be good for the so-called roadmap, but the only difference for residents of Bethlehem would be a slight easing of traffic jams.
ROADMAP MAIN POINTS
Phase 1 (to May 2003): End to violence against Israelis and Palestinians; Palestinian political reform; Israeli withdrawal and freeze on settlement expansion; Palestinian elections
Phase 2: (June-Dec 2003) Creation of an independent Palestinian state; international conference and international monitoring of compliance with roadmap
Phase 3 (2004-2005): Second international conference; permanent status agreement and end of conflict; agreement on final borders, Jerusalem, refugees and settlements; Arab states to agree to peace deals with Israel
"The withdrawal is just ceremonial, nothing is changed in the city except for soldiers in uniform; Bethlehem is still in Israeli control," Hanna Nasser, Bethlehem 's mayor, told BBC Four News.
But he was upbeat about the prospects for peace.
"As long as there is international interest and there never has been so strong a commitment from the world to make the roadmap succeed, there are enough reasons why the Palestinians should be more serious than before to keep security for themselves and for the state of Israel as well."
Israeli troops and armour had not actually been based in Bethlehem, although Israeli jeeps patrolled the town sporadically and special forces moved through the town at night to make arrests.
Israeli forces have occupied Bethlehem several times during the 33-month intifada - including the month-long siege of the Church of the Nativity in 2002.
Troops have remained firmly in place since last November, when a Bethlehem resident carried out a suicide bombing on a Jerusalem bus.
On Tuesday, Mr Abbas - also known as Abu Mazen - said the withdrawals from Gaza and
Bethlehem would be "followed by pullbacks from the rest of the cities and towns and Palestinian refugee camps".
However, Israeli Defence Minister Shaul Mofaz told the cabinet on Wednesday that Palestinian militant groups would have to be disarmed before Israel would pull out of any other Palestinian areas, officials said.
Israeli tanks and troops withdrew from the northern Gaza Strip on Sunday under a similar deal, and reopened the territory's main road to Palestinian traffic for the first time since the uprising began.
This coincided with the calling of a temporary ceasefire by the Hamas and Islamic Jihad militant groups and the mainstream Fatah movement.
However, the Fatah-affiliated al-Aqsa Martyrs Brigade has not joined the ceasefire and is reported to have launched two attacks in the West Bank since Monday.
Meanwhile, Palestinian security sources quoted by AFP news agency accused Israeli forces still posted in the Gaza Strip of violating the disengagement deal in the last 24 hours.
They said troops closed off Gaza's main road overnight and opened fire twice on Palestinian farmers outside Jabalya in northern Gaza.