Iraq became a sovereign country on Monday, 15 months after the United States led a coalition to oust Saddam Hussein from power and two days before the June 30 deadline for control to be turned over to the interim Iraqi government.

"This is a historical day," Iraqi Prime Minister Iyad Allawi (search) said. "We feel we are capable of controlling the security situation."

Added Iraqi President Ghazi Al-Yawer: "This is a day we are going to take our country back into the international forum. We'd like to express our thanks to the coalition," Al-Yawer continued. "There is no way to turn back now."

Both President Bush and British Prime Minister Tony Blair were informed of the decision on Monday while in Turkey for a NATO (search) summit.

"This is a day of great hope for Iraqis and a day that terrorist enemies hoped never to see," Bush later said in an address with Blair. "The terrorists are doing all they can to stop the rise of a free Iraq but their bombs and attacks have not prevented Iraqi sovereignty and they will not prevent Iraqi democracy.

"Iraqi sovereignty is a tribute to the will of Iraqi people and the courage of Iraqi leaders."

Allawi also had some stern words for the guerrillas attacking the coalition and Iraqis, calling them "enemies of Islam, enemies of the people of Iraq — those who align themselves with infidels."

"Infidels shouldn't frighten us," Allawi continued, adding that the Iraqi people need to stand up to the terrorists. "God is with us," he added. "I warn the forces of terror once again ... we will not forget who stood with us and against us in this crisis."

Bush: 'We Kept Our Word'

Saying the turnover is a "proud, moral achievement" for the U.S.-led coalition, Bush said, "we pledged to end a dangerous regime to free the oppressed and restore sovereignty — we have kept our word."

Saying foreign terrorists and former regime loyalists will not halt progress in Iraq, the president said "the struggle is first and foremost an Iraqi struggle."

But "the civilized world will not be frightened or intimated and Iraq's new leaders have made their position clear."

Bush marked the transfer with a whispered comment and a handshake with Blair, his closest ally in the war, as they gathered with world leaders.

Stealing a glance at his watch to make sure the transfer had occurred, Bush put his hand over his mouth to guard his remarks, leaned toward Blair and then reached out to shake hands. Defense Secretary Donald H. Rumsfeld, a row behind the president, beamed.

Bush was passed a note from National Security Adviser Condoleezza Rice that put it this way: "Mr. President, Iraq is sovereign." Bush wrote "Let freedom reign!" on the note and passed it back.

Blair, in the later address with Bush, said, "the battle for Iraq and its future, if you'd like, is in a genuine sense, the frontline in the battle against terrorism and the new security threats that we face."

"The strategy of these terrorists is to try and prevent Iraq from becoming a symbol of hope, not just for the Iraqi people but actually for the region of the wider world," the prime minister said.

Bush had already sent an official letter to Allawi formally requesting diplomatic relations with the sovereign government of Iraq.

The surprise transfer of power occurred in a small ceremony in Baghdad's Green Zone (search) with little fanfare.

L. Paul Bremer, who has overseen the Coalition Provisional Authority (search) since the fall of Saddam, signed the legal papers in the presence of Allawi and presented them to the chief justice of Iraq, Midhat al-Mahmoud, at 10:46 a.m. local time. About a half dozen Iraqi and coalition officials were also in attendance.

"You have said, and we agreed, that you are ready for sovereignty," Bremer said. "I will leave Iraq confident in its future."

Bremer left Iraq a few hours later. An aide to Bremer said only, "he was going home."

John Negroponte, the U.S. ambassador to Iraq and now the top American representative in the country, arrived in Baghdad Monday afternoon.

"Iraqis are happy inside, but their happiness is marred by fear and melancholy," said artist Qassim al-Sabti. "Of course I feel I'm still occupied. You can't find anywhere in the world people who would accept occupation. America these days, is like death. Nobody can escape from it."

Ali Hussein Ali, a retired teacher, held blue prayer beads as he played dominoes at a Baghdad cafe.

"People are afraid to express their happiness," Ali said. "When security prevails, Iraqis will be very happy. They will celebrate when the American troops leave and when they are no longer taking orders from the Americans."

Many observers agreed that challenges lie ahead that will test the will and resilience of the new government.

"The main question I have is how much authority are we going to have to take the military measures necessary to help the new Iraqi government," former Defense Secretary Caspar Weinberger told Fox News.

But "I think it was very smart to do it today because obviously the 30th will be a big target for all the militants and all the opposition," he added. "It's a big step today — it removed one big target from the terrorists … now we'll see just how well the Iraqis can govern themselves. I think they can do it — it's just gonna take a little time."

In other developments, Saddam will be turned over to the Iraqis and indicted this week, FOX News has learned. Saddam will appear before an Iraqi judge to be handed a formal indictment, a top Iraqi official said. A military spokesman said he will remain in a U.S.-run jail because the Iraqi government lacks a suitable prison.

NATO Offers a Helping Hand

NATO alliance leaders have offered to train security forces in Iraq in response to Allawi's request.

"We, the 26 heads of state and government of the nations of the Atlantic alliance, meeting in Istanbul, declare our full support for the independence, sovereignty, unity, and territorial integrity of the Republic of Iraq and for strengthening of freedom, democracy, human rights, rule of law and security for all the Iraqi people," said a NATO statement issued Monday.

The interim government will operate under major restrictions — some of them imposed at the urging of the influential Shiite clergy that sought to limit the powers of an unelected administration.

For example, the government will not be able to amend the interim constitution and can only hold power seven months until, as directed by a U.N. Security Council (search) resolution, there must be elections "in no case later than" Jan. 31. The Americans will still hold responsibility for security.

"The political arm of our operation here has gone out of business. Certainly the military operation has not gone out of business," Brig. Gen. Mark Kimmitt, the coalition deputy operations chief, told AP Radio.

The Hope for Security

U.S. officials hope that Iraqis will believe that they are now in control of their country and that will take the steam out of the insurgency.

"Allawi said we are ready to take this all over ... it is part of our security strategy ... to have Iraqi officials be held accountable by Iraqis," said the senior administration official in Turkey.

During the swearing in, members of Allawi's Cabinet each stepped forward to place their right hand on the Quran and pledged to accept their new duties with sincerity and impartiality. Behind them, a bank of Iraqi flags lined the podium.

"Before us is a challenge and a burden and we ask God almighty to give us the patience and guide us to take this country whose people deserves all goodness," Al-Yawer said after taking his oath. "May God protect Iraq and its citizens."

Former Secretary of State Henry Kissinger told Fox News that it "remains to be seen" just how successful the handover will be.

"It will depend on the degree which the government can establish its authority and the degree to which it gets foreign support," Kissinger said. "The test will be whether they can maintain themselves as a sovereign power."

FOX News' Greg Palkot, Liza Porteus, Jane Roh and The Associated Press contributed to this report.