Soldiers from a new Iraqi force have begun patrols in Falluja, as US marines begin the handover of security of the city to Iraqis.
There were scenes of celebration as US troops began pulling back
The Falluja Brigade, led by one of Saddam Hussein's ex-generals and made up of former Iraqi army soldiers, will eventually number about 1,000.
US forces say they will stay around Falluja until Iraqis show they can control checkpoints and other areas.
Meanwhile, five people have been killed in attacks against occupation forces.
US military officials said two American sailors were killed in Anbar province, which includes Falluja.
Further north, one US soldier and two foreign security guards were killed in two separate attacks in and around Mosul.
The killings come exactly a year after President Bush declared major combat operations in Iraq over.
Since then about 540 US troops have been killed, more than in the initial invasion.
But in his weekly radio address, President Bush vowed the US would finish its work in Iraq.
"Despite many challenges, life for the Iraqi people is a world away from the cruelty and corruption of Saddam's
regime," the president said.
He added: "The failure of Iraqi democracy would embolden terrorists around the globe, increase dangers to the American people, and extinguish the hopes of millions in the Middle East."
In Falluja, many Iraqis took to the streets on Saturday to celebrate the withdrawal of the marines, shouting "victory over the Americans".
Iraqi families have begun returning to the city.
The first 200 soldiers in the Falluja Brigade, led by Gen Jasim Mohamed Saleh, arrived on Friday night.
The coalition hopes the new force will win the trust of residents in a city that has seen weeks of bloody clashes with rebels.
But US commanders say the Falluja Brigade will not necessarily calm the situation in the city immediately.
Gen Saleh, who used to command a brigade of Saddam Hussein's elite Republican Guard, said he was forming "a new emergency military force" that would help bring order to the city.
US military spokesman Brig Gen Mark Kimmitt says marines are in the process of vetting Gen Saleh's background, but have confidence in him.
"We are certainly not withdrawing from Falluja. Nothing
could be further from the truth," Brig Gen Kimmitt told a Baghdad news conference.
He said the US was sticking by its demands for local people to hand over the killers of four US contractors.
Falluja, a predominantly Sunni Muslim city of 300,000 people 50km (30 miles) west of the capital Baghdad, has been a centre of resistance to the US-led occupation of Iraq.
Doctors in Falluja say 600 people have already been killed and thousands have fled the city since the siege began on 5 April.
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.