Ryan Crocker, the US ambassador in Iraq, and General David Petraeus, the US military commander in Iraq, said the transfer reflected the improved capabilities of Iraqi security forces in the province, but added that more work needed to be done.
"For the past two months, Iraqi security forces in Qadisiyah [Diwaniyah] have been operating independently and demonstrated their readiness to assume responsibility for the provincial security," they said in a joint statement.
"The provincial and military leadership in Qadisiyah will have to work co-operatively in order to attain the sustainable security necessary for long term economic prosperity."
Rebuilding and reconstruction
Al-Rubaie also called on provincial leaders to build on the improved security to rebuild the local economy.
"We thank the multinational forces for their contribution to the stability and security of this province," he said.
"It is time now for the sons of the province to turn the page of security and start a new page of rebuilding and reconstruction to create new jobs and make the province the most prosperous among all other provinces."
Diwaniyah has seen repeated clashes among Shia factions - notably supporters of Shia leader Muqtada al-Sadr and the rival Supreme Iraqi Islamic Council of Abdel Aziz al-Hakim, a key member of the governing coalition.
Last November, Iraqi and US troops launched a major offensive in the province of about one million people.
More than 3,000 Iraqi soldiers and police supported by tanks and hundreds of US and Polish troops, took part in the assault targeting fighters in the province's capital, also called Diwaniyah.
Elsewhere, a car bomb in the north of the country has killed at least 15 people, including seven children.
According to a police official, 90 people were also injured in the blast on Wednesday near a popular market in the town of Tal Afar, 420km northwest of Baghdad.
The wounded included a number of policemen, officials said.