Moderate cleric Hassan Rowhani took office as Iran's president on Saturday, succeeding Mahmoud Ahmadinejad, after Supreme Leader Ayatollah Ali Khamenei endorsed him, Iranian media said.
Rowhani's resounding election win in June raised hopes of a negotiated end to the dispute over Iran's nuclear program. That would avert a possible new war in the Middle East.
Khamenei kissed Rowhani on the cheek and the new president kissed the leader on his lapel.
The start of Rowhani's presidency puts an end to Ahmadinejad's eight years in office during which Iran grew more isolated and came under wide-ranging United Nations, U.S. and European Union sanctions over its nuclear programme, putting enormous pressure on the economy.
Rowhani faces huge challenges, including combating inflation he put last month at 42 percent, bringing down high unemployment and bridging the political divisions between conservative, moderate and reformist factions.
His most immediate test is persuading parliament to approve his candidates for cabinet positions, which he is expected to introduce on Sunday after he takes the oath of office.
"Rowhani will certainly appoint more competent men and women to key economic ministries and institutions. He will also follow saner economic policies," said Shaul Bakhash, an Iran historian at George Mason University in Virginia.
"But the economic problems are staggering ... Above all, without a serious easing of sanctions, it is difficult to see how Rowhani can get the economy moving again."