The Iraqi authorities have begun taking control of their armed forces from the US-led coalition.
A key test will be if Iraqi forces can quell the insurgency
Control of the Iraqi navy and air force and the 8th Division of the army was handed over at a ceremony in Baghdad.
Other divisions will be transferred in the coming months according to a timetable set by Iraq's leaders.
US officials called it a milestone in Iraq's history, but the key test will be whether the Iraqi-led forces can control violence across the country.
A BBC correspondent in Baghdad says the transfer of control could be long, slow and fraught with problems.
The accord was signed by Iraq's Prime Minister Nouri Maliki and coalition commander Gen George Casey at a ceremony in at the Defence Ministry in Baghdad's heavily fortified Green Zone.
Mr Maliki said it was a "great step and a great day in Iraqi history".
Iraqi soldiers have been trained and equipped under US auspices
"The new Iraqi army is being built by the courage of its sons who will dedicate their lives to protect their citizenry, and today the new Iraqi army has been rebuilt on values other than sectarianism," he added.
Gen Casey said: "It marks a milestone in the relentless journey of Iraqi forces. It's a story of courage, perseverance and commitment to the values of Iraq."
He added that the US, which has about 140,000 military personnel in Iraq, would be there to protect Iraqis "wherever they are threatened".
Correspondents say it is unclear how fast the complete transfer of security control can be achieved.
"It's the prime minister's decision how rapidly he wants to move along with assuming control," said US spokesman Maj Gen William Caldwell said on Wednesday.
"They can move as rapidly thereafter as they want. I know, conceptually, they've talked about perhaps two divisions a month," Maj Gen Caldwell said.
US-led forces disbanded what was left of the Iraqi army after they overthrew Saddam Hussein's rule in 2003.
Since then, the coalition has been training and equipping new Iraqi forces with a view to their taking over security and allowing the eventual withdrawal of foreign forces from Iraq.
In the latest violence, a suicide car bomber killed 10 people at a police control centre in Baghdad.
At least 23 others died in bombings and shootings elsewhere in the country, many targeting police and security patrols.