U.S. Maj.-Gen. Daniel Bolfer, commander of U.S forces in Baghdad, gives a symbolic key to the Iraqi Defence Ministry to Iraqi Army Lt.-Gen. Aboud Gambar, who's in charge of Baghdad's security, on Monday. (Loay Hameed/Associated Press)

The U.S. ambassador to Iraq said Washington thinks "Iraqis are ready," hours before the midnight deadline passed in Baghdad for U.S. combat troops to finish their pullback to bases outside cities.

Ambassador Christopher Hill, who assumed his post in April, also said on Monday that Iraqis "truly understand that if Iraq is to develop, it needs to do more to exploit its oil reserves."

Hill reiterated his confidence in Iraqi forces, saying that they "have gained an incredible number of capabilities over the years."

He also said, however, that his main concern was that a lack of progress in efforts to reconcile Shias, Sunnis and Kurds was feeding the violence that still marks the daily lives of many Iraqis.

Iraqi forces assumed formal control of Baghdad and other cities on Tuesday after American troops handed over security in urban areas, taking a defining step toward ending the U.S. combat role in the country.

Earlier on Monday in Ramadi, a Sunni city 115 kilometres west of the capital, Interior Minister Jawad al-Bolani, a Shia, attended a big military parade marking the U.S. withdrawal from cities.

The celebration was also attended by Sheik Ahmed Abu Risha, the leader of a group of Sunni tribes that has turned against al-Qaeda in Iraq in the Anbar province.

Midnight's handover to Iraqi forces filled many citizens with pride but also trepidation that government forces are not ready and that violence will rise.

Shias fear more bombings by Sunni militants; Sunnis fear that the Shia-dominated Iraqi security forces will give them little protection.

If the Iraqis can hold down violence in the coming months, it will show the country is finally on the road to stability.

If they fail, it will pose a challenge to U.S. President Barack Obama's pledge to end an unpopular war that has claimed the lives of more than 4,300 American troops and tens of thousands of Iraqis.

The withdrawal, required under a U.S.-Iraqi security pact, marks the first major step toward withdrawing all American forces from the country by December 31, 2011.

Obama has said all combat troops will be gone by the end of August 2010.

Some troops will remain to train forces

Despite Tuesday's formal pullback, some U.S. troops will remain in the cities to train and advise Iraqi forces. U.S. troops will return to the cities only if asked.

The U.S. military will continue combat operations in rural areas and near the border, but only with the Iraqi government's permission.

The U.S. has not said how many troops will be in the cities in advisory roles, but the vast majority of the more than 130,000 U.S. forces remaining in the country will be in large bases scattered outside cities.

There have been some worries that the 650,000-member Iraqi military is not ready to maintain stability and deal with a stubborn insurgency.

Privately, many U.S. officers worry the Iraqis will be overwhelmed if violence surges, having relied for years on the Americans for nearly everything.