Falluja residents waving Iraqi flags and Iraqi security forces cheered the former officer, Jasim Muhammad Salih, when he entered the town centre and gave a speech on Friday.
The former general, wearing his old army uniform, said he was forming a military unit to restore calm to the bloodied Iraqi city of Falluja after an agreement with US occupation forces.
Salih, who a relative said had been chief of staff of a Republican Guard brigade, said the new unit would help Iraqi security forces bring order to the town, so US forces would not be needed.
He did not say who would make up the unit.
Major-General Jasim Muhammad
Salih has arrived in Falluja
"We have now begun forming a new emergency military force to help the forces of the Iraqi Civil Defence Corps and the Iraqi police in completing the mission of imposing security and stability in Falluja without the need for the American army, which the people of Falluja reject," Salih said.
But US commanders, whose men maintained positions in parts of Falluja where fighting has been heaviest, said they would continue operations against fighters who refused to hand over heavy weapons and against suspected foreign fighters.
Heavy explosions in the east of the city showed fighting continued. A car bomber blew himself up, killing two marines and wounding six close to their base near Falluja.
Earlier, US marines withdrew from the southeastern part of Falluja which they had occupied for the last three weeks while Iraqi police were deployed in some areas inside the city.
The 1st Battalion, 5th Marines Regiment withdrew from frontline bases in the abandoned factories and garages of Falluja's southern industrial zone, witnesses said.
Occupation troops also moved out of areas in the western part of the city.
The city has been the scene of the most violent clashes during April with scores of US soldiers and hundreds of Iraqi civilians and fighters killed.
US troops have been frustrated in their attempts to overcome a highly motivated and increasingly resourceful resistance force.
Falluja civilians have been badly
affected by the fighting
The withdrawal came after Lieutenant-General James Conway, who commands the 1st Marine Expeditionary Force, held closed-door talks with a group of Iraqis.
US military officials have said their negotiations with leaders in Falluja would lead to the deployment of more Iraqi forces in the city.
But they have denied the troop withdrawal spelt an end to the siege of Falluja, which began after four US contractors working for the occupation forces were killed and two were then publicly mutilated.
Elsewhere on Friday, a US soldier was wounded when an explosive device detonated on the highway east of the town of Hiyt, Aljazeera's correspondent in Ramadi quoted witnesses as saying.
"The explosion damaged a US military truck and American forces were immediately at the scene," witnesses said.
The ambush followed an attack late on Thursday in which the representative of the Iraqi Communist Party in the municipality council in Diyala, northeast of Baghdad, was seriously wounded by unidentified armed men.