General George Casey, the top US commander in Iraq, said at a ceremony to mark the event on Thursday: "From today forward, the Iraqi military responsibilities will be increasingly conceived and led by Iraqis."
Casey and Nuri al-Maliki signed the document which puts the Iraqi prime minister in direct control of the country's military.
Al-Maliki now has complete control over the country's small navy and air force, and of the 8th Iraqi Army Division, based in the south.
"The Iraqi Army today is rebuilt again, away from sectarian violence," al-Maliki said at the ceremony.
The handover on Thursday by US-led forces was scheduled to take place five days ago but was cancelled at the last minute as the two sides tried to work out differences over the documents involved.
Neither the Iraqis nor the foreign multinational force officials would describe the exact nature of the disagreement, except to say that it was procedural rather than substantive.
US military spokesman Major-General William Caldwell said on Wednesday: "This is such a huge, significant event that's about to occur.
"If you go back and you map out significant events that have occurred in this government's formation in taking control of the country, tomorrow is gigantic."
Caldwell said the two sides decided it would be better to delay the event until there was complete agreement.
Handing over control of the country's security to Iraqi forces is vital to any eventual drawdown of US forces in Iraq.
After disbanding the remaining Iraqi army following the US-led invasion in 2003, foreign forces have been training the new Iraqi military.
However, it is unclear exactly how quickly the Iraqi forces will be prepared to take over their own security.
"It's the prime minister's decision how rapidly he wants to move along with assuming control," Caldwell said.
In Thursday's ceremony, the prime minister will take control of Iraq's small naval and air forces, and the 8th Iraqi Army Division.
"They can move as rapidly thereafter as they want. I know, conceptually, they've talked about perhaps two divisions a month," Caldwell said.
The 8th Division has recently been in the centre of one of the fiercest battles between Iraqi forces and Shia militias. The division's troops fought militiamen in the southern city of Diwaniya, 130km south of Baghdad, for 12 hours in a battle that left more than 20 soldiers and 50 militiamen dead.
Days before the engagement, the Division's commander, Brigadier-General Othman al-Farhoud, told The Associated Press his forces still needed support from the US-led forces for things such as medical assistance, storage facilities and air support.