Susilo, 55, swept to power by vowing faster job growth, a war on corruption and tough punishment for "terrorists".
He begins his five-year term as president of the world's most populous Muslim nation amid high expectations after comfortably winning last month's elections - the first in which the country's 210 million people voted for their head of state directly.
Despite his mandate, Susilo will face problems pushing through reforms against deeply entrenched vested interests in the country's business, government and legal elite.
He is also up against a potentially hostile parliament, where his Democratic Party holds only 10% of the seats.
"In the name of God, I swear that as the president of the Republic of Indonesia I will uphold the law and the constitution and serve the nation," Susilo said to cheers from lawmakers at the country's parliament.
A Muslim leader held a copy of Islam's holy book, the Quran, over Susilo's head as he took the oath.
The prime ministers of Australia, Malaysia, East Timor and Singapore attended the ceremony in a regional show of support for Yudhoyono. It was the first time that foreign leaders had witnessed the swearing in of a new Indonesian president.
Susilo's vice-president, businessman Muhammad Jusuf Kalla, was also sworn in.
Susilo took over from Megawati Sukarnoputri, the eldest daughter of Indonesia's founding father Sukarno.
The 57-year-old former housewife - whose rule has been criticised as lacklustre and aloof - did not attend the ceremony, something widely seen as a snub to Susilo, who served in her Cabinet as security minister.
Megawati Sukarnoputri (L)
did not attend the ceremony
The 20 September polls passed off peacefully, and were seen as capping a turbulent and often bloody transition to democracy after the fall of longtime dictator Suharto in 1998.
Later on Wednesday, Susilo was scheduled to name his Cabinet.
Financial markets were eagerly awaiting the lineup to gauge his commitment to rooting out corruption and fixing the country's economic woes - two key campaign pledges.
Fighting terrorism is also high on his list of priorities.
In an interview with Singapore's Straits Times published on Wednesday, Susilo said he was considering reviewing anti-terror laws to make them stronger.
Susilo (R) has the backing of
Australian PM John Howard (L)
"The problem for us so far has been the difficulty in detaining suspected terrorists indefinitely," he told the paper.
"Tougher laws can help us deter acts of terrorism and it is something I will have to review."
He did not elaborate.
After the Bali blasts, Indonesia passed tough anti-terror laws that allow for suspects to be held for six months. Some government officials have complained they are too weak.
"We still face the grave threat of terrorist attacks," Susilo said. "I will take all necessary measures to make sure that Indonesia does not fall victim to another attack."
Susilo presented few distinct policies during the campaign, but voters hungry for change were impressed by his grasp of the issues facing the country and his steadfast, honest image.
He attended officer training college in the United States and is popular in Washington because he is seen as a better partner in Bush's War on Terror than Megawati was.
Some critics have expressed concern over his army background. The military, which propped up Suharto's 32-year government and still retains much influence on civilian life, is viewed with suspicion by many Indonesians.