The ceremony was hidden away from ordinary people who hours later were still catching the news through the media and friends.
"This is an historical day," Allawi said during the ceremony. "We feel we are capable of controlling the security situation."
News of the handover was leaked minutes earlier by Iraqi Foreign Minister Hushiar Zibari at the NATO conference in Istanbul, Turkey.
Analysts in Baghdad told Aljazeera.net that the move, which has long been scheduled to take place on Wednesday, was brought forward because of the deteriorating security situation.
A series of deadly anti-occupation attacks have left well over 100 dead and twice that number injured over the past week.
The so-called transfer of sovereignty places responsibility for much of the day to day running of Iraq in the hands of the interim government, whose members were drawn from groups of mainly former Iraqi exiles approved by Washington.
But US officials will continue to advise ministers on how to conduct their responsibilities and US commanders will remain in overall charge of security in the country.
Iraqi analysts and politicians told Aljazeera.net the so-called transfer of sovereignty was incomplete at best, while others called it a sham that suited US interests.
"There may have been a transfer of documents but there has not been a transfer of sovereignty," said Jawdat al-Ubaid, the head of the opposition umbrella group the Iraqi Democratic Congress (IDC).
Attacks had increased in the run
up to the handover of power
"The government will not be truly independent so long as there is a foreign army in Iraq. It is a good step, the correct step, but it is not enough."
A political scientist at the Iraqi Academy in Baghdad, professor Hani Ashur, agreed that the presence of more than 150,000 US-led troops in the country meant "there is no real independence in Iraq", and the interim government faced a severe credibility problem.
"Among ordinary Iraqis, there is little genuine trust in the government. In their view, there is no difference between the government and the US occupation authorities."
A political analyst at Baghdad University's Media College, Dr Liqaa Maki, said many Iraqis were sceptical that the handover ceremony would signal real change.
"There may have been a transfer of documents but there has not been a transfer of sovereignty. The government will not be truly independent so long as there is a foreign army in Iraq"
Iraqi Democratic Congress
"If people still see US troops in the streets, they won't accept that anything has really changed." But he admitted the transfer of limited authority would come as good news to many Iraqis who hoped the interim government would distinguish itself from the Bremer regime.
"Iraq is in a miserable situation right now. There are few jobs, little agriculture, bureaucracy, or industry. People want to see a government with new policies, a new relationship between the government and the people."
Out in the streets of Baghdad, that scepticism was widespread, though a few expressed hope for the future.
A 24-year-old student at Baghdad University, Abd Allah Ahmad Saad said he was still digesting the news after a friend had rung to inform him 20 minutes earlier.
"We're waiting to see what will happen. People hope for the best but I'm not optimistic. As long as the Americans are here, there will be no real independence.
"We either have to face reality or fool ourselves. The US did not come all this way and make such an effort just to hand back power without taking care of its own interests."
Ammar al-Janabi, a civil engineer, said the handover was "only an act on paper".
Resistance attacks increased as
the handover approached
"The government is not really independent. It's not just about troops - these people were not elected so we have our doubts about their aims and their independence."
He also criticised the way the news had first come out at the NATO conference in Turkey, saying Iraqi people had become bystanders to decisions about their fate.
"Such a declaration should have happened here. We just see things happen through the media and people don't have the sense that they have a say in what's going on.
"My family and friends feel the same way: we want things to change but not this way."