Four-and-a-half years of British military control in southern Iraq came to an end with the handover of Basra Province.
Full responsibility for the area passed into Iraqi hands when a formal memorandum of understanding was signed by Major General Graham Binns, who led British troops into the city in 2003.
Iraqis earlier celebrated the transition with a separate gathering in the city itself.
Foreign Secretary David Miliband, who was present at the ceremony, said Britain would remain a "committed friend".
"Our aim is to see an Iraq run by Iraqis for all Iraqis," he said.
Major General Binns spoke of his personal affection for the city of Basra, telling the gathering: "This ceremony is particularly poignant for me. I commanded the coalition troops which entered Basra in April 2003, four-and-a-half years later I have the privilege of handing this city back."
He added: "I came to rid Basra of its enemies and I now formally hand Basra back to its friends; this is a city forever close to my heart."
Speaking afterwards, Mr Miliband indicated that there could be a decision on further British troop reductions within months.
He said: "The Prime Minister made clear that by March of next year, by the spring of next year, there will be about 2,500 British troops, we will have to make a decision then about the future."
He dismissed suggestions that Britain was leaving the Iraqis in the lurch by handing over now, but conceded that Basra remained a "dangerous place".
