Iraqi forces will now monitor the zone's security
Iraq has taken control of security in Baghdad's fortified Green Zone after a UN mandate for troops expired.
The end of the UN mandate - put into place soon after the invasion in March 2003 - means Iraq will now take greater control of its own security.
Iraqi Prime Minister Nouri Maliki welcomed the move as Iraq's "day of sovereignty" at the handover ceremony.
US and British forces will remain in Iraq - but with Iraqi permission, under two separate bilateral deals.
"I'd like to congratulate you and the Iraqi people on this day for which we have waited for more than 17 years," Mr Maliki said at the handover ceremony at the Presidential Palace, the former home of ousted leader Saddam Hussein.
"We have the right to consider this day as the day of sovereignty and it is the beginning that Iraq will regain every particle of its soil as well as all of its will and sovereignty."
Iraqi forces will take over responsibility for the security of the zone, the fortified area which houses the Iraqi government, coalition headquarters and most embassies.
The fortified zone is a powerful symbol of the US-led occupation of Iraq.
British troops are based in the southern city of Basra
Foreign forces in the zone will also face new rules after the security handover.
Iraqis now have the right to prosecute US soldiers for any crimes committed while off-base and off-duty, though it is not yet clear if the same rule will apply to British troops.
The details of Britain's bilateral agreement with Iraq have not yet been made public.
British and Iraqi forces held a handover ceremony at Basra Airport.
"This is a great and important day on which the Basra airport control tower and the entire airport was turned over by the British to us," Basra provincial governor Mohammed Masbah al-Waeli was quoted as saying by the AFP news agency.
Two Iraqi prisoners being held by British forces at Basra air base have been handed back to the Iraqi authorities, as Britain no longer had the right to detain them after the UN mandate expired at midnight on Wednesday.
The two men were suspected of involvement in the murder of two British soldiers in March 2003, shortly after the invasion.