A deadly car bomb in northern Iraq shattered the mood of celebration tonight just hours after makeshift bands, dancing teenagers and crowds waving Iraqi flags had marked the withdrawal of American troops from the nation’s cities.

Six years after the US-led bombardment of the capital, control of the city’s streets has been handed back to Iraqis.

The landmark handover was greeted with the first full military parade through Baghdad since the fall of Saddam Hussein’s regime. Tanks and armoured vehicles decorated with artificial flowers, flags and banners rolled through the Green Zone as local police officers and soldiers assumed responsibility for security.

Within hours, a car bomb killed at least 27 people and wounded many more in the northern city of Kirkuk. The death toll from the blast in a heavily Kurdish suburb could rise, a police official said.

The government had declared today a public holiday supposedly allowing people to gather and celebrate in cities more used to explosions, shoot-outs and the quasi-occupation of American forces.

Parties began last night under the watchful eye of Iraqi soldiers and police desperate to ensure that gatherings to mark the US-pullback did not spiral into violence. Thousands of Iraqis made their way through tight security to a party in Baghdad's largest park to celebrate with musicians and poets.

The atmosphere today, however, was more circumspect. Police cars were draped in flowers but the streets of Baghdad were unusually quiet. On a holiday, the parks along the banks of the Tigris are normally full but today they remained empty.

Shopkeepers and police officers suggested that locals were fearful that militant groups would use the day to make a high-profile attack. An Iraqi policeman said that the forces were "expecting car bombs" and Sinan Mohammad, 31, a furniture shop owner told The Times that, "some people are worried that there might be an explosion or security problem."

Thus far, there have been no reports of violence in the capital but the car bomb in Kirkuk, 155 miles north of Baghdad, as well as a militant attack on a checkpoint in Mosul and a shooting in Tikrit have served as a warning of the potentially dangerous handover period. A surge in bombings has already killed more than 200 people this month and leave has been cancelled for all personnel as the Iraqi forces attempt to retain stability.

This morning, Nouri al-Maliki, the Prime Minister, insisted that Iraq’s army and police were up to the task of defending the country in the wake of the US pullback. “It is a big mistake for people to think that the Iraqis will not handle the security issue,” Maliki said. “It is an offence to the Iraqis. The people who said that the foreign troops would never withdraw and would keep permanent bases in our country were giving a green light to the terrorists to kill civilians."

Today’s pullback is part of a landmark security agreement signed last November between Baghdad and Washington covering the fate of the 133,000 US troops still in Iraq, a complete pullout is scheduled to be completed by 2011.

President Jalal Talabani thanked US forces for their role in overthrowing now executed dictator Saddam Hussein in 2003, and in the years of bloodshed that followed.

“They bore the burden and dangers against the most cruel regime and against the mutual enemy - the terror,” Mr Talabani said on state television.

The handover came as the US army announced that four of its soldiers died from combat injuries yesterday, taking to 4,321 the number of American troops killed since the invasion.

General Ray Odierno, the top US commander in Iraq, said he believed Iraq was now a better country. “I believe the Iraqi people are much better off not having a dictator such as Saddam Hussein in charge,” he said. “They are now going to be able to see that they can move ahead and the people of Iraq will have a say in their government."

He said that Iraq's security forces could be very proud of their dedication, and called the day a milestone. But he emphasised that al-Qaeda would, "now go after the softest of soft targets," and he acknowledged that the transition was not without risk. "I have angst," he said. "The Iraqi people have angst."

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