7:38pm UK, Monday June 28, 2004

The Prime Minister and President Bush have hailed the birth of a new Iraq after the transfer of power to Baghdad two days early.

Paul Bremer hands over power

Mr Bush said the world had witnessed "the arrival of a free, sovereign Iraqi government".                

He said that after "decades of brutal rule" the Iraqi people "have their country back".                  

Tony Blair spoke alongside Mr Bush at the Nato summit in Istanbul.                  

He said: "Today's obviously an important staging post on the journey of the people of Iraq towards a new future - one in which democracy replaces dictatorship, where freedom replaces oppression and in which all the people of Iraq can look forward to the possibility and the hope of an Iraq that genuinely unites, a future for people from whatever part of Iraq they come."                  

At 10.26am Baghdad time the White House said Mr Blair and Mr Bush looked at their watches, which they had synchronised and nodded at each other to acknowledge the handover of power.                  

Soon afterwards, President Ghazo al-Yawar and prime minister Iyad Allawi were sworn in to their positions in the new Iraqi government.                  

Iraq's foreign minister, Hoshyar Zebari, said the deteriorating security situation had led to the handover date being brought forward.                         

It was feared guerrillas would stage a major attack to overshadow the handover.                                 

Mr Allawi, speaking after taking the oath, warned insurgents they faced defeat. "I warn the forces of terror once again," he said. "We will not forget who stood with us and against us in this crisis.Paul Bremer, head of the coalition provisional authority, presented the legal documents to Mr Allawi at a small ceremony before leaving the country two hours later.Mr Allawi said elections were likely to be held in January.                                                     

The interim government will have "full sovereignty", according to a UN Security Council resolution on the handover earlier this month.                                                                     

But there are important constraints on its powers.                                                                     

It is barred from making long-term policy decisions and will not have control over more than 160,000 foreign troops who will remain in Iraq.                                                                     

The government has the right to ask them to leave - but has made clear it has no intention of doing so.                                           

The US will also retain a large diplomatic presence with 1,000 staff working at its embassy in Baghdad.