The departure of the 500-member British force from the palace left the nation's second-largest city without any foreign force presence for the first time since the US-led invasion in 2003.
Iraqi soldiers hoisted their flag above the base after the British withdrawal was completed before dawn.
|"They were facing catastrophe and withdrew because of the attacks by the Mahdi Army"|
Mahdi Army fighter
The apparently smooth transition to Iraqi control contrasted with the handover of bases in Muthanna and Maysan provinces last year, which were ransacked hours after British troops left.
Members of the al-Mahdi Army cheered the withdrawal as a victory for the militia and a defeat for Britain.
"They were facing catastrophe and withdrew because of the attacks by the Mahdi Army," Abu Safaa, one of the group's fighters, told Reuters news agency.
The palace complex has been under daily mortar and rocket fire from suspected Shia militias.
Lieutenant-General Mohan al-Fireji, the Iraqi commander in the area, said on Monday: "We told those [militias] who were fighting the British troops that the Iraqi forces are now in the palaces."
Gordon Brown, the British prime minister, rejected suggestions that the troops were retreating under fire.
"This is a pre-planned and ... organised move from Basra Palace to Basra air station," Brown told BBC radio.
"This is essentially a move from a position where we were in a combat role ... to being in an overwatch role."
|British troops will continue to have overall |
responsibility for security in Basra [AFP]
British forces will operate from the air base and "retain security responsibility for Basra until we hand over to provincial Iraqi control, which we anticipate in the autumn", Britain's defence ministry said.
Basra has witnessed violent clashes between rival Shia groups, including supporters of Muqtada al-Sadr, the Supreme Iraqi Islamic Council and the smaller Fadhila party.
While residents say there is now a fragile calm between the groups, there are fears the British withdrawal will be accompanied by an upsurge in factional violence.
Iraq's second city is strategically vital as the hub of southern oilfields that produce nearly all of the government's revenue, and the centre for imports and exports through the Gulf.
Last month, General Jack Keane, a former vice-chief of staff of the US army, said there was "frustration" in Washington at the deteriorating security situation in the British-run area.
Britain's defence ministry said US officials had been consulted over the plan.