The US military has handed over security of Iraq's Najaf province, south of the capital Baghdad, to government forces.
A US commander said Iraqi forces were becoming more capable
Najaf is the third province to come under Iraqi security control.
The handover occurred as the new US Defence Secretary Robert Gates arrived in Iraq two days after taking office.
Mr Gates is meeting military commanders and Iraqi politicians to get advice on a new policy for the country that President George W Bush is formulating.
The handover ceremony took place under heavy security in a stadium in the city of Najaf, the province's capital.
The senior US commander present, Maj Gen Kurt Cichowski, said the handover was a sign of the growing capability of Iraq's security forces.
But Iraq's national security adviser, Mouwaffaq al-Rubaie, sounded a note of caution.
"If we don't handle the responsibility, history will destroy us," he said.
British forces handed over Muthana province in the south in July and Dhi Qar province was transferred to Iraqi control in September.
The UK wants to hand over Basra province in the first half of 2007.
As the ceremony was taking place, Mr Gates arrived in Baghdad to examine in person the options facing the US in Iraq.
Speaking to reporters at the White House later in the day, President Bush said he had not yet decided on whether to increase troop levels in Iraq.
But he did say he was "inclined" to increase the size of the US army and marines to deal with the long-term fight against terrorism.
Mr Bush said the current military is being stretched too thin
He said he has asked Mr Gates to assess both ideas.
Mr Bush has said he agreed with Pentagon and Capitol Hill officials that the military is being stretched too thin.
The US currently has about 140,000 troops in Iraq.
Some military commanders have been sceptical that more troops will alter the situation.
One of them, the commander of US forces in the Middle East Gen John Abizaid, is to retire after more than three years in the job, and will do so early next year, a spokesman for US Central Command said.
Gen Abizaid had been due to leave in July this year, but former Defence Secretary Donald Rumsfeld had asked him to stay on until early 2007.
His departure will clear the way for the new defence secretary to choose his own commander in the strategic region, correspondents say.
Mr Bush said he has not yet made a decision about a new strategy for Iraq, which he is expected to announce next month.
Attacks on US and Iraqi troops and civilians reached their highest level since power was handed over to an interim Iraqi government in June 2004, a Pentagon report said on Monday.
It said the worst violence was in Baghdad and the western province of Anbar, long the focus of activity by Sunni insurgents.
The report came just hours after the new defence secretary said failure in Iraq would be a "calamity" that would haunt the US for many years.