US troops have officially handed over military control of the southern city of Najaf to Iraqi forces.
The US handed over the keys to its Najaf base to Iraqi forces
It is the first of a planned series of security transfers across Iraq, paving the way for an eventual withdrawal of foreign forces from the country.
Iraq's army is "capable of responding to all security needs... we are now here in a strictly advisory mode," said US commander Lt-Col James Oliver.
Iraqi troops chanted slogans in support of local Shia Muslim religious leaders.
"Long live Sistani," the 1,500 soldiers shouted, referring to Najaf-based cleric Ayatollah Ali Sistani.
There were also chants of "Saddam is a coward", referring to the deposed former president.
"It gives me great pleasure to say the Iraqi army in Najaf can control the area," said Brig-Gen Augustus Collins, who made the official handover on behalf of the US army.
The ceremony installed Iraqi troops in the strategic Forward Operating Base (FOB) Hotel in southern Najaf, while US forces withdrew to a base further outside the city.
The handover area includes the holiest Shia shrines in Iraq
"Although we are transferring authority at this FOB, we will still be here to help the people of Najaf," Gen Collins said.
Najaf is Iraq's holiest city for Shias and was the scene of heavy fighting in 2004 between US forces and militia forces loyal to radical Shia cleric Moqtada Sadr.
Washington has refused to set a deadline for withdrawal of US-led forces from Iraq, saying the timetable depends on the Iraqis' ability to maintain security.
Elsewhere in Iraq, officials say large areas of the north-western city of Qaim have been taken over by insurgents loyal to the militant Islamist organisation al-Qaeda.
Reports say gunman are patrolling the streets and summarily executing alleged collaborators with the US-backed regime in Baghdad.
US troops are stationed outside the town, but reportedly do not have the capability to retake it while an assault on another rebel stronghold, Talafar to the north, has drawn away US troops.
In other incidents, a roadside bombing followed by armed clashes has left four Iraqi troops and three civilians dead in the town of Khaldiya, near Falluja, west of Baghdad.
An Iraqi army officer was killed by gunmen in Dhuluiya, north of Baghdad.
US marine aircraft bombed two bridges over the Euphrates near the Syria border in an effort to stem the flow of insurgents and their equipment.
High pressure water pipes in north-east Baghdad were sabotaged overnight, causing drinking water supplies to be suspended in large sections of the capital, Sharqia TV reported.