Mbeki, whose African National Congress was re-elected in a landslide victory two weeks ago, took the oath on Tuesday at Pretoria's Union Buildings and vowed to bring all South Africans a share in the nation's wealth.
"Endemic and widespread poverty continues to disfigure the face of our country. It will always be impossible for us to say that we have fully restored the dignity of all our people as long as this situation persists," he said.
Cheers erupted as anti-apartheid icon Nelson Mandela arrived at the swearing-in ceremony - an echo of the momentous day 10 years ago when he became South Africa's first black president.
"If it wasn't for him, we would not be standing here in Pretoria now. We love him so much," said 21-year-old Portia Nthabu, one of the thousands of people gathered for the inauguration and celebratory concert shown live on TV.
Zimbabwean President Robert Mugabe, accused of political
repression at home by his opponents, also received a standing ovation and noisy cheers went up for a delegation from the
world soccer body FIFA which next month decides whether South Africa wins the race to host the 2010 World Cup.
Triumphs and challenges
Mbeki's inauguration falls on the anniversary of South Africa's first democratic election on 27 April 1994, which saw Mandela lead the ANC to triumph in polls that ended centuries of oppression by whites.
Many feared those polls would trigger bloody ethnic violence or autocratic rule. But the "rainbow nation" has largely defied the doomsayers, rising as Africa's most powerful economy and one of its most stable democracies.
Nelson Mandela remains a popular
icon in the African country
But South Africa faces huge challenges, not least an HIV/AIDS epidemic that affects one in nine of the population, steep unemployment and high levels of violent crime.
Prominent writer Zakes Mda, writing in Tuesday's New York Times, described his homeland as an "ailing nation" where a new elite, both black and white, were failing the impoverished majority.
"A well-placed section of South African society is moving forward at a breathtaking speed. Unfortunately, it is too oblivious of those it leaves behind to be fearful of them."
Mbeki's inauguration was a lower-key affair than Mandela's in 1994, a historic event attended by hundreds of dignitaries, thousands of ordinary South Africans and much of the world's media.
"If it wasn't for him (Mandela), we would not be standing here in Pretoria now. We love him so much"
South African national
Most countries outside Africa sent low-level delegations this time, which some said reflected the confidence the international community now has in the country.
Officials said the party was nevertheless the largest South Africa had staged since 1994, with a giant open-air concert, a military fly-by and celebrations at South African missions around the globe.
"The whole world participated in one form or another to help liberate us, so when we are celebrating our 10 years of liberation we have to celebrate it with our friends," Foreign Minister Nkosazana Dlamini-Zuma said on Tuesday.