The handover, which effectively ends 4 1/2 years of British control of the southern part of Iraq, was supported by many Al-Basrah residents.
One Al-Basrah resident said he hoped that under Iraqi security it would be easier to move around the area because presently "there is no security." The man said "you are afraid to go out of your home at [7:00 or 8:00 at night] because there is no security. Every day there are clashes and every day there is a problem."
In a ceremony at Al-Basrah's airport, British and Iraqi representatives signed a document to formalize the handover.
In his speech, Iraq's national security adviser, Muwaffaq al-Rubaie, said the "historic" day marked a "victory for Iraq and a defeat for its enemies."
Al-Rubaie thanked British troops for their role in protecting the city from insurgents, retraining Iraqi soldiers, and rebuilding the economy.
Major General Graham Binns, who led British troops into the city in 2003, said Al-Basrah had "begun to regain its strength" because " reduction in violence over the last few months has provided the opportunity for the people to reinvest in the city." Binns cautioned that "or the future of Al-Basrah, the current security situation must continue and improve."
British Foreign Secretary David Miliband, who also attended the handover ceremony, acknowledged that Britain was not handing over "a land of milk and honey" to local forces.
Miliband told the BBC that Iraq remains a violent society whose tensions need to addressed by Iraqi political leaders.
Earlier, Britain transferred security control of the southern provinces of Muthanna, Maysan, and Dhi Qar to Iraqi forces.
A triple car bomb attack, which killed about 40 people in Maysan province last week, served as a reminder of the potential for violence in areas vacated by the British.
But Al-Basrah resident Adel Jassim said, "We are happy today that the security will be transferred from British occupation forces to Iraqi forces." Jassim added, "You can see happiness on the faces of the people. Honestly I cannot express myself because I am relieved of a burden. Yes, [Iraqi forces] are capable of ensuring security and of imposing authority and law."
In a BBC poll of 1,000 Al-Basrah residents, more than 85 per cent said they believed British troops have had a negative effect on the Iraqi province since 2003.
Two-thirds thought security would improve following the handover.
A British force will remain in southern Iraq for the time being, confined to an air base outside Al-Basrah. It will only get involved in combat if they themselves are attacked or if Iraqi commanders call for support.
The 4,500 British troops still in Iraq will focus on training Iraqi forces. Troop numbers are set to be reduced to 2,500 by the spring.
Oil-rich Al-Basrah is the ninth of Iraq's 18 provinces to be handed back to local forces by the U.S.-led international coalition.