At noon EST (5pm GMT) power was transferred from George W Bush as Mr Obama placed his hand on the same Bible used by Abraham Lincoln at his inauguration in 1861 and took his oath on the steps of the US Capitol.
In his inauguration speech, Mr Obama spoke candidly of the huge challenges facing the US, including a weakened economy and difficult military campaigns abroad.
"That we are in the midst of crisis is now well understood," Obama told the vast crowd spread out for miles before him, estimated at well over a million.
"Our nation is at war, against a far-reaching network of violence and hatred. 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 told the vast crowd in front of him.
"Homes have been lost, jobs shed, businesses shuttered. Our healthcare 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."
He declared to the cheering crowd, however, that the US would pull through.
"Today I say to you that the challenges we face are real. They are serious and they are many. They will not be met easily or in a short span of time. But know this, America: they will be met. On this day, we gather because we have chosen hope over fear, unity of purpose over conflict and discord."
Although his call to America to take responsibility for the fate of the nation was a stern one, the address remained forward-looking.
"This is the source of our confidence - the knowledge that God calls on us to shape an uncertain destiny. This is the meaning of our liberty and our creed - why men and women and children of every race and every faith can join in celebration across this magnificent mall, and why a man whose father less than 60 years ago might not have been served at a local restaurant can now stand before you to take a most sacred oath," he said.
Obama concluded: "America. In the face of our common dangers, in this winter of our hardship, let us remember these timeless words. With hope and virtue, let us brave once more the icy currents, and endure what storms may come. Let it be said by our children's children that when we were tested we refused to let this journey end, that we did not turn back nor did we falter; and with eyes fixed on the horizon and God's grace upon us, we carried forth that great gift of freedom and delivered it safely to future generations."
Proceedings to transfer power from the previous administration began with the traditional pre-inauguration coffee at the White House between Obama and his wife, Michelle, and George and Laura Bush.
Security across Washington DC was tight as millions of visitors descended on the city to share in the celebrations marking Obama’s inauguration.
Purpose Driven pastor Rick Warren prayed for President Obama earlier in the proceedings and the Rev Joseph E Lowery, one of the great figures of the civil rights movement, delivered the Benediction to end the ceremony, asking God’s blessing over Obama, his family and his administration.
