American marines have been withdrawing from the Iraqi city of Falluja after weeks of bloody clashes with rebels.
There were scenes of celebration as US troops began pulling back
Two battalions have been pulling back from front-line positions and are set to move further out during the day.
A new Iraqi force, led by one of Saddam Hussein's former generals, will move into the city while US troops maintain a presence in and around Falluja.
Coalition military chiefs hope the Iraqi force will be more able to gain the trust of the city's residents.
But even as the withdrawal got under way, two American soldiers were killed in a roadside bomb attack near the main US military base outside Falluja.
General Jasim Mohamed Saleh, who used to command a brigade of the Republican Guard, said he was forming "a new emergency military force" that would help bring order to the town.
US military spokesman Brig Gen Mark Kimmitt says marines have vetted General Saleh and have confidence in him.
Hundreds of people cheered the former general as he was driven into the centre of his home town wearing his military uniform, reports said.
The force of about 1,000 would operate "without the need for the American army, which the people of Falluja reject", General Saleh said - although it will remain answerable to the US military.
The US military's top general in the region, Gen John Abizaid, said the move was "a possible breakthrough" but cautioned "the conditions that must be met
are foremost in our minds".
US marines have been demolishing defences and removing razor wire from positions in the south and west of Falluja after more than three weeks of battles with rebel fighters.
Falluja, a predominantly Sunni Muslim city of 300,000 people 50km (30 miles) west of the capital Baghdad, has been a hotbed of resistance to the US-led occupation of Iraq.
Fresh clashes in Falluja overnight saw US aircraft hit targets in the city.
Doctors there say 600 people have already been killed and thousands have fled the city since the siege began on 5 April.
Gen Kimmitt said the US was sticking by its demands for local people to hand over the killers of four US contractors.
Marines will remain in positions around the city to support the Iraqis and will still be in overall command.
But correspondents say that in the city itself, the withdrawal is being seen as a victory over the US-led forces.
Pentagon 'left behind'
Firebrand Shia cleric Moqtada Sadr attacked the decision to mobilise the Iraqi force at Friday prayers in Kufa, outside Najaf.
"They are trying to reintegrate the Baathists. It proves the Americans hate the Iraqi people," Mr Sadr told worshippers.
The US has vowed to kill or capture Mr Sadr and destroy his Mehdi army which has been fighting coalition forces.
Overnight, Pentagon officials were still maintaining that final details of the withdrawal plan had yet to be worked out.
The BBC's Dominic Hughes in Baghdad says the Pentagon appears to have been left behind by the pace of events on the ground.
But whether the Iraqi force will be able to contain the most radical of the rebels in Falluja, how loyal it will be to the coalition or whether some of the gunmen themselves will form part of it is still not clear, he says.
US Deputy Defence Secretary Paul Wolfowitz said: "The goal has got to be to try to isolate the killers from the population so that if military action is necessary it can be done with a minimum of civilian casualties."
US commanders also insisted that the insurgents - who they say include former members of Saddam Hussein's Republican Guard military units and foreign Islamic militants - should turn in their heavy weapons.
Meanwhile, a new opinion poll for the New York Times and CBS News suggested dwindling support among Americans for the invasion and occupation of Iraq.
Only 47% of 1,042 Americans questioned believed invading Iraq was the right thing to do, the lowest support recorded in the polls since the war began.