Along with Bolivian politicians, invited dignitaries and guests from around the world attended the ceremony on Sunday including 11 presidents and government leaders from Latin America and Europe.
Among those present at the ceremony in Parliament were Hugo Chavez, Venezuela's president and Luiz Inacio Lula da Silva, the president of Brazil.
The United States, which fears Morales for his reforming agenda through which he intends to end discrimination and inequality, sent Tom Shannon, a low-level diplomat.
After meeting Shannon a day earlier, Morales told reporters: "Relations between Bolivia and the United States are going to continue."
The presence of Ricardo Lagos, Chile's president, also held symbolic weight.
Bolivia and Chile broke off diplomatic relations in 1978 against a background of strained ties dating from a 19th-century war in which Chile won mineral-rich Pacific coastal territory from Bolivia, leaving the country landlocked.
"From 500 years of resistance we pass to another 500 years in power"
Evo Morales, Bolivian president
Lagos met Morales hours before his swearing in at Morales's apartment. Together they raised their hands on the balcony to the crowd outside and referred to each other as "brothers" and "friends".
"Today, a leader with extraordinary legitimacy takes office and we hope to have the best of relations," said Lagos, the first Chilean leader to attend the inauguration of a Bolivian president. "We have excluded nothing from our talks."
Michelle Bachelet, the Chilean president-elect, declined an invitation to attend the inauguration but told journalists last week she hoped that Chile and Bolivia could re-establish full diplomatic relations.
In his inaugural speech, Morales declared that "the 500 years of Indian resistance have not been in vain".
"From 500 years of resistance we pass to another 500 years in power," he said. "We're going to put an end to injustice, to inequality."
Morales blamed neo-liberal economic policies of the past and the "looting of our natural resources" for the widespread poverty in the country.
Miners and Indians packed the colonial government square chanting "Evo, Evo" and waving the indigenous rainbow-hued flag, the Wiphala.
Bolivia's people hope that the election of an indigenous Indian to the highest political office will bring stability after street protests toppled two previous presidents and dozens died in clashes with security forces.
Teofira Marca Sajamaan, an Indian woman from Morales's home province of Oruro, said: "We have a lot of faith that he can help us because he is a poor man like us."