With 11 million Americans out of work and trillions of dollars lost in the stock market's tumble, Obama emphasized that his biggest challenge is to repair the tattered economy left behind by outgoing President George W. Bush.
"Our time of standing pat, of protecting narrow interests and putting off unpleasant decisions - that time has surely passed," Obama said. "Starting today, we must pick ourselves up, dust ourselves off and begin the work of remaking America."
It was a day of high spirits - jarred by sudden concern about the health of Sen. Edward M. Kennedy, a legendary Democrat who is suffering from brain cancer. He suffered an apparent seizure at a Senate luncheon in honor of Obama. "This is a joyous time but it's also a sobering time," Obama said. "And my prayers are with him and his family and (Kennedy's wife) Vicki."
As Kennedy was put into an ambulance, he told Senate colleague Chris Dodd, D-Conn., "I'll be OK, I'll see you later," according to Dodd.
Obama wove a thread of personal responsibility and accountability through his inaugural address. He spoke of a "new era of responsibility" and alluded to the inability - or unwillingness - of Americans to adjust to the passing of an industrial-based economy. "Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age," he said.
After four hours of pomp and ceremony at the Capitol, Obama and his wife, Michelle, rode in a tall, heavily armored Cadillac limousine along the 1.5 mile parade route to the White House. To the delight of cheering onlookers, the Obamas got out and walked down several blocks of Pennsylvania Avenue, waving to people kept behind police baricades.
Two years after beginning his improbable quest as a little-known, first-term Illinois senator with a foreign-sounding name, Obama moved into the Oval Office as the nation's fourth-youngest president, at 47, and the first African-American, a barrier-breaking achievement believed impossible by generations of minorities.
He said it was a moment to recall "that all are equal, all are free and all deserve a chance to pursue their full measure of happiness." In another racial reference, he paid tribute to workers in the past who "endured the lash of the whip and plowed the hard earth."
Obama's election was cheered around the world as a sign that America will be more embracing, more open to change. "To the Muslim world," Obama said, "we seek a new way forward, based on mutual interest and mutual respect."
Still, he bluntly warned, "To those leaders around the globe who seek to sow conflict, or blame their society's ills on the West - know that your people will judge you on what you can build, not what you destroy."
"To those who cling to power through corruption and deceit and the silencing of dissent, know that you are on the wrong side of history, but that we will extend a hand if you are willing to unclench your fist," Obama said in his address, which ran 18½ minutes.
A mighty chorus of cheers erupted as he stepped to the inaugural platform, a midday sun warming the crowd that had waited for hours in the cold. There were some boos when Bush and Vice President Dick Cheney came onto the platform.
The dawn of the new Democratic era - with Obama allies in charge of both houses of Congress - ends eight years of Republican control of the White House by Bush, who leaves Washington as one of the nation's most unpopular and divisive presidents, the architect of two unfinished wars and the man in charge at a time of economic calamity that swept away many Americans' jobs, savings and homes.
Obama called for a political truce in Washington to end "the petty grievances and false promises, the recriminations and worn-out dogmas, that for far too long have strangled our politics."
He said that all Americans have roles in rebuilding the nation by renewing the traditions of hard work, honesty and fair play, tolerance, loyalty and patriotism.
With the economy in a long and deepening recession, Obama said it was time for swift and bold action to create new jobs and lay a foundation for growth. Congressional Democrats have readied an $825 billion stimulus plan of tax cuts and spending for roads, bridges, schools, electric grids and other projects.
Contradicting the objections of Ronald Reagan and Bill Clinton to big government, Obama said, "The question we ask today is not whether our government is too big or too small, but whether it works."
After the ceremony, Obama and his wife escorted Bush and his wife to a helicopter on the East Front of the Capitol for the trip to nearby Andrews Air Force Base and a flight back home to Texas.
In his remarks, Obama took stock of the nation's sobering problems.
"That we are in the midst of crisis is now well understood," he said.
"Our nation is at war, against a far-reaching network of violence and hatred. Our economy is badly weakened. ... Homes have been lost, jobs shed, businesses shuttered. Our health care is too costly, our schools fail too many, and each day brings further evidence that the ways we use energy strengthen our adversaries and threaten our planet."
Outlining goals abroad and putting foes on notice, he declared:
"We will begin to responsibly leave Iraq to its people and forge a hard-earned peace in Afghanistan. With old friends and former foes, we will work tirelessly to lessen the nuclear threat, and roll back the specter of a warming planet. We will not apologize for our way of life, nor will we waver in its defense, and for those who seek to advance their aims by inducing terror and slaughtering innocents, we say to you now that our spirit is stronger and cannot be broken. You cannot outlast us, and we will defeat you."
It was the first change of administrations since the terror attacks of Sept. 11, 2001.
Bush - following tradition - left a note for Obama in the top drawer of his desk in the Oval Office.
White House press secretary Dana Perino said the theme of the message - which Bush wrote on Monday - was similar to what he has said since election night: that Obama is about to begin a "fabulous new chapter" in the United States, and that he wishes him well.
The unfinished business of the Bush administration thrusts an enormous burden onto the new administration, though polls show Americans are confident Obama is on track to succeed. He has cautioned that improvements will take time and that things will get worse before they get better.
Culminating four days of celebration, the nation's 56th inauguration day began for Obama and Vice President-elect Joe Biden with a traditional morning worship service at St. John's Episcopal Church, across Lafayette Park from the White House. Bells pealed from the historic church's tower as Obama and his wife, Michelle, arrived five minutes behind schedule.
The festivities weren't ending until well after midnight, with dancing and partying at 10 inaugural balls.
By custom, Obama and his wife, and Biden and his wife, Jill, went directly from church to the White House for coffee with Bush and his wife, Laura. Michelle Obama brought a gift for the outgoing first lady in a white box decorated with a red ribbon.
Shortly before 11 a.m., Obama and Bush climbed into a limousine to share a ride to the Capitol for the transfer of power, an event flashed around the world in television and radio broadcasts, podcasts and Internet streaming.
Just after noon, Obama stepped forward on the West Front of the Capitol to lay his left hand on the same Bible that President Abraham Lincoln used at his first inauguration in 1861. The 35-word oath of office, administered by Chief Justice John Roberts, has been uttered by every president since George Washington. Obama was one of 22 Democratic senators to vote against Roberts' confirmation to the Supreme Court in 2005.
The son of a white, Kansas-born mother and a black, Kenya-born father, Obama decided to use his full name in the swearing-in ceremony.
To the dismay of liberals, Obama invited conservative evangelical pastor Rick Warren - an opponent of gay rights - to give the inaugural invocation.
About a dozen members of Obama's Cabinet and top appointees were ready for Senate confirmation Tuesday, provided no objections were raised. But Republican Sen. John Cornyn of Texas indicated he would block a move to immediately confirm Secretary of State-designate Hillary Rodham Clinton. Still, she is expected to be approved in a roll call vote Wednesday.
More than 10,000 people from all 50 states - including bands and military units - were assembled to follow Obama and Biden from the Capitol on the 1.5-mile inaugural parade route on Pennsylvania Avenue, concluding at a bulletproof reviewing stand in front of the White House. Security was unprecedented. Most bridges into Washington and about 3.5 square miles of downtown were closed.
Among the VIPs at the Capitol was pilot Chesley "Sully" Sullenberger, the hero of last week's US Airways crash into the Hudson River.
In an appeal for bipartisanship, Obama honored defeated Republican presidential rival John McCain at a dinner Monday night. "There are few Americans who understand this need for common purpose and common effort better than John McCain," Obama said.
Young and untested, Obama is a man of enormous confidence and electrifying oratorical skills. Hopes for Obama are extremely high, suggesting that Americans are willing to give him a long honeymoon to strengthen the economy and lift the financial gloom.
On Wednesday, his first working day in office, Obama is expected to redeem his campaign promise to begin the withdrawal of U.S. forces from Iraq under a 16-month timetable. Aides said he would summon the Joint Chiefs of Staff to the Oval Office and order that the pullout commence.
Associated Press Writers Alan Fram, Donna Cassata, Gillian Gaynair, Ricardo Alonso-Zaldivar, Kevin Freking, Ed Tobias, Ben Evans, Seth Borenstein and H. Josef Hebert contributed to this report.