The carefully planned transition is aimed at reversing Umno's failing fortunes, but comes at a challenging time with Malaysia's economy on the brink of recession and the government facing an increasingly powerful opposition.
In his address Abdullah warned Umno member that the party that has dominated Malaysian politics for 50 years was in danger of being seen as out of touch with even its core support base.
"Umno's glory has dimmed," Abdullah said. "Today everything that Umno does is seen as wrong, everything that Umno says is believed to be untrue."
Abdullah warned delegates attending the assembly that Umno will perish if it continued with its old ways of silencing critics, jailing opponents and discriminating against minority groups.
And he said the party must come to its senses, warning that seeping materialism had made "a number of party members greedy and avaricious."
"The path that we choose will determine whether we continue to remain relevant or whether we are reduced to a forgotten footnote in the pages of history."
"Sadly, there are still those who feel that we do not need to pursue reforms. They believe that Umno will regain its glory if we revert to the old ways ... by restricting the freedom of our citizens and by silencing their criticism," he said.
'Life and death'
"Umno must never practice discrimination to the extent that non-Malays view it as a racist party"
Abdullah Ahmad Badawi, Umno president
Umno has steered the ruling Barisan Nasional (National Front) coalition that has governed the country since gaining independence from the British in 1957.
But in a shocking election performance last year the coalition lost its traditional two-thirds parliamentary majority for the first time in 40 years.
The country's opposition made the biggest ever political gain by taking control of five states, in what is widely seen as a protest vote against the coalition.
Calling on the party to avoid "racial and religious positions that are extremist", Abdullah said Umno "must never practice discrimination to the extent that non-Malays view it as a racist party".
"The rights of every citizen must always be protected, guaranteed and respected," he added.
Abdullah replaced Mahathir Mohamad as prime minister in 2003 amid great hopes that he would lead a much-needed reform in the country politics, bureaucracy and judiciary.
But he largely failed to deliver on his promise during his time in office, indicating in his speech that he was shackled by Umno conservatives.
In handing over the rein of power to his deputy, Abdullah said Najib has the "maturity and experience to navigate the nation to greater heights".