Austria's European Union partners are imposing immediate political sanctions in an attempt to isolate the new government.
In a brief ceremony, members of the new Cabinet - five from the Freedom Party and five from the conservative Austrian People's Party - swore their oaths of office.
Heading the new government as chancellor is Wolfgang Schuessel, the leader of the People's Party.
Mr Haider will not himself have a seat in the Austrian cabinet but is certain to play an influential role behind the scenes
Anti-Haider protest
Several thousand people demonstrated against the new government outside the presidential palace.
Confronted by police in full riot gear, they chanted anti-Haider slogans, blew whistles, and hurled tomatoes and containers of paint in a noisy but
generally peaceful protest.
Austria's European Union partners are imposing immediate political sanctions in an attempt to isolate the new government.
All 14 members of the EU are halting bilateral contacts with Austria, and will exclude its officials from all unofficial talks and engagements. It will also refuse to support the appointment of any Austrian officials to international posts.
Israel has recalled its ambassador and has announced that Mr Haider will not be allowed into the country.
"Israel cannot remain silent in the face of the rise of extremist right-wing parties, in particular in those countries which played a role in the events which brought about the eradication of a third of the Jewish people in the Holocaust," a foreign ministry statement said.
The United States has expressed deep concern, while also dismissing a pledge signed by the coalition partners to uphold democratic values. Washington says it will be keeping a close watch on developments.
Other steps being taken :
Russia also expressed concern on Friday, saying it hoped Austria's new government would not take measures that might destabilise Europe.
And in an interview on German television, he said it was an affront to the Austrian public that he had been obliged by President Klestil to sign a declaration accepting Austria's responsibility for its Nazi past.
Mr Haider added: "I have no intention to wander about in the world and apologise for all kinds of things."
The president approved the new coalition on Thursday, but only after refusing to allow two of the Freedom Party's nominated members a place in the cabinet.
One was said to have been rejected for making xenophobic statements; the other for threatening the president with "a bloody head" if the coalition were not approved.
Presidential doubts
Mr Klestil also expressed reservations about the Freedom Party taking on cabinet positions, but said he had to uphold the electoral will of the people.
He is to make a televison address later in the day (1900 GMT).
After the general election last October, the Freedom Party had the second largest number of seats in parliament.
Mr Haider's party will provide the ministers for justice, finance and social affairs. It will also get the vice-chancellorship.
But the People's Party will have the foreign ministry and with it, the job of repairing Austria's damaged reputation abroad.