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The change of leadership to Mohamad's deputy, Abdullah Badawi, has been anticipated since Dr Mahathir announced his resignation in June 2002. He agreed to stay on until today to ease the transition to his successor.
Dr Mahathir has led Malaysia for almost half its history since independence in 1957, and the handover is a big change for a country where about 40% of the population were not even born when he came to power.
In that time, he has overseen Malaysia's transformation from a backwater to high-flying industrialised nation.
The 78-year-old Dr Mahathir has also gained a controversial reputation abroad as a blunt-speaking pragmatist who regularly lashes out at the West and defends authoritarian practices at home.
Only a few days ago, he angered foreign governments and Jewish groups by claiming a Jewish cabal "ruled the world".
He was also criticised for the abrupt dismissal and arrest of former Deputy Prime Minister, Anwar Ibrahim.
Anwar was jailed for six years in 1999 on charges of corruption, and given a further nine-year sentence in 2000 on a charge of sodomy.
Anwar claims both charges were politically motivated.
Dr Mahathir has himself admitted he is ready for retirement.
"I've had my day. It's other people's turn now," he told reporters. "I had 22 years. I can't complain."
The handover took place at a ceremony in the National Palace, broadcast live on television.
The King of Malaysia, Syed Sirajuddin Putra Jamalullail, swore in Abdullah Badawi as the country's next prime minister.
Mr Badawi, wearing a black tunic and traditional ethnic Malay dress, pledged to "fulfil the obligations of this position honestly and with all my energy".
At the end of the day, Dr Mahathir symbolically checked out at the new government city in Putrajaya using the punch card system he introduced for civil servants.
Mr Abdullah will check in using the same system on Monday morning.
The new prime minister is very different in style from Dr Mahathir.
He is seen as a safe pair of hands, yet someone who has gained a tough reputation in his treatment of political opponents and alleged terrorists.
He will have his first major test in a general election widely expected early next year.
Abdullah Badawi went on to win a landslide general election victory in March 2004.
He gained a reputation for being more conciliatory with political rivals than his predecessor, with a far less autocratic style.
In September 2004, the sodomy charge against former deputy Prime Minister Anwar Ibrahim was overturned on appeal.
Mr Anwar was freed, although the court upheld the conviction for corruption, preventing him from seeking public office until 2008.
Dr Mahathir went on to become an advisor to the state oil company, Petronas, and to the Malaysian national car manufacturer, Proton.
On taking on the car manufacturer, he quickly poured cold water on a suggestion that it look for an international partner, causing concern among international investors.
Correspondents say he is believed to have other giant former state enterprises in his sights, such as Telecom Malaysia and national power company Tenaga National.
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