BAGHDAD - The United States handed over control of Baghdad's Green Zone and Saddam Hussein's presidential palace to Iraqi authorities Thursday in moves described by the country's prime minister as a restoration of Iraqi sovereignty.

At a ceremony marking the transition, Nouri al-Maliki said he will propose Jan. 1 be declared a national holiday to commemorate what he called "Sovereignty Day" - the day Iraq took the lead in security away from U.S. forces, regained control of its airspace and reclaimed a wide swath of the capital's heavily fortified Green Zone. Iraq already marks New Year's Day as a holiday.

The area that became known as the Green Zone on the west bank of the Tigris River was occupied by the United States shortly after the 2003 U.S. invasion and walled off from the rest of the city.

Until Wednesday, Saddam's former palace formally served as the U.S. Embassy and headquarters of the U.S. military in Iraq. Thursday's palace handover was mostly ceremonial, as most U.S. diplomats and military officials had long since moved to a new embassy building on the other side of the Green Zone, which is also known as the International Zone.

"This palace is the symbol of Iraqi sovereignty and by restoring it, a real message is directed to all Iraqi people that Iraqi sovereignty has returned to its natural status," al-Maliki said.

"We have the right to be proud and to be happy and to hold celebrations these days, especially on this day," said al-Maliki, adding he would submit his national holiday proposal to the cabinet. "This day is to be remembered and we have the right to consider it a national day."

The 10-square-kilometre area along the Tigris is separated from the city by a four-metre-high wall of reinforced concrete, dotted with watch towers and machine-gun nests.

Restricted to U.S. and coalition personnel, several other embassies and the Iraqi Parliament and government ministries, it was considered the most potent and visible sign of American occupation and has often come under insurgent attack.

Although now under Iraqi control, it is unlikely to be dismantled any time soon because of the violence persisting around Baghdad - despite an overall dramatic drop in attacks and killings countrywide.

The violence in Iraqi continued Thursday.

A roadside bomb killed two Iraqi soldiers in the town of Jalula, 130 kilometres northeast of Baghdad, a regional police official said.

In the northern city of Mosul, where the fight against "al-Qaida in Iraq" continues, a parked truck bomb killed three police officers trying to search it and wounded a bystander.

In the city of Kirkuk, also north of Baghdad, Iraqi and U.S. troops killed three suspected al-Qaida gunmen during a raid, police said.

Violence around Iraq had plunged in 2008, with attacks declining to an average of 10 a day from 180 a year ago.

U.S. military deaths in Iraq also plunged by two-thirds in 2008 from the previous year, a reflection of the improving security following the U.S. military's counterinsurgency campaign and al-Qaida's slow retreat from the battlefield.

According to a tally by The Associated Press, at least 314 U.S. soldiers died in Iraq in 2008, down from 904 in the previous year. In all, at least 4,221 U.S. soldiers have died in Iraq since the war began in 2003.

For Iraqis, the fatalities had also plunged: During 2008, at least 7,496 Iraqis died in war-related violence according to an AP count, including 6,068 civilians and 1,428 security personnel, down 60 per cent from 2007.

The Associated Press tally does not reflect a comprehensive total for Iraqi deaths because reports do not come in from all of the country. The estimate, however, has proven accurate for tracking trends.

The plunge in violence in Iraq follows the U.S. "surge" of 2007, when thousands of additional troops were sent in to try to rein in a country that appeared to be on the verge of disintegration.

That was coupled with a counterinsurgency campaign that included a decision by Sunni tribesmen to switch allegiances and fight al-Qaida. A focused effort to rout Shiite extremists also gave U.S. and Iraqi forces the upper hand.

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