British Major General John Cooper signed the document turning over responsibility for Muthanna province, a Shi’ite province that had been under British and Australian control.
“It is a great national day that will be registered in the history of Iraq,” Prime Minister Nouri al-Maliki said in a ceremony in the provincial capital of Samawah.
“This step will bring happiness to all Iraqis.”
The strategy of transferring all 18 provinces to Iraqi control depends on the capability of Iraq’s newly trained police and army to maintain order against threats by Sunni insurgents and sectarian militias.
Mr Maliki warned that “the terrorists” were bent on upsetting the process and destroying Iraq’s national unity.
“They will spare no effort to destroy this step and ensure that no further steps are taken,” he said.
“But, with solidarity and patience, you will cut off the hands that want to sabotage this region.”
About 700 British and Australian troops were stationed in Muthanna, the Australians protecting 600 Japanese soldiers there on a humanitarian mission.
The Japanese troops are in the process of leaving the country, while the British and Australians will redeploy elsewhere in southern Iraq to stand in reserve in case the Iraqis need help with security.
Coalition forces are expected to hand over responsibility soon in other quiet southern provinces.
The US-led coalition plans to transfer responsibility for the 17 other provinces by the end of next year.
US and other international troops would then step back, allowing the Iraqis to run security while staying in reserve in case of a crisis.
That would be followed by a third stage in which US troops would leave Iraq.
National security adviser Mouwafak al-Rubaie said he was confident the Iraqis could meet the challenge in Muthanna, where he acknowledged the threat of violence was low.
Meanwhile at least 25 people were killed in another day of violence in Iraq.