September's terror attacks did not dampen celebrations
They braved sub-zero temperatures to watch cascades of red, white and blue ticker tape and the dropping from a flagpole of a crystal ball symbolising 2002.
It was the last official engagement for New York's Mayor, Rudolph Giuliani. His successor is the billionaire financier Michael Bloomberg.
The city's New Year events began on Monday at 6pm local time, when bells from 400 churches began ringing out in remembrance of the estimated 3,000 people who died when suicide hijackers crashed two airliners into the twin towers of the World Trade Center on 11 September.
Mr Giuliani, whose leadership in the aftermath of the attacks - a period which also saw anthrax mail attacks on media organisations and the crash of an airliner in Queens - won praise both at home and abroad, was at the centre of the ceremony, setting in motion the 500 kilogram crystal ball, which landed at the stroke of midnight.
Four minutes after midnight, to the strains of Frank Sinatra's song New York, New York, Mr Giuliani swore in Mr Bloomberg as the new mayor, ahead of a formal inauguration ceremony later on Tuesday.
While no specific terrorist threat was directed at the event, police with metal detectors scanned people as they entered the square through 16 access points, while dogs trained to sniff out bombs were also in action.
All post-boxes, rubbish bins and news stands had been removed from the square, and manhole covers were sealed shut.
Revellers had been told to leave their alcohol at home.
Mr Giuliani leaves office, despite the wave of popularity he has been riding since 11 September, because he is barred by law from running for a third consecutive term as mayor.
"I think I'll walk out tonight and turn over to Mike Bloomberg a different city than the one that was handed to me," he said before the midnight celebrations.
Prior to 11 September, Mr Giuliani had made his name with his controversial "zero tolerance" fight against crime - a policy which saw the steepest drop in crime in decades but was also blamed for heightening racial tensions in the city.
At his final news conference, before the traditional ceremony which saw the outgoing mayor leave City Hall to the sound of bagpipes, Mr Giuliani said:
"The achievement I'm the proudest of for my administration is restoring the spirit of the city, making people believe in being New Yorkers again."