Obama has made history by being sworn in as the first black president
of the United States.
Earlier, Mr Obama and his wife Michelle attended a church service with Vice-President-elect Joe Biden and his wife Jill at St John's Episcopal Church. Mr and Mrs Obama then had coffee at the White House before George and Laura Bush left there for the final time.
At Capitol Hill, Mr Obama was cheered by hundreds of thousands of people as he arrived for the inauguration ceremony.
Joe Biden was then sworn-in as Vice-President and minutes later Mr Obama placed his hand on President Abraham Lincoln's inaugural bible and took the Oath of Office.
This was followed by the US Marine Corps band playing "Hail to the Chief" and a 21-gun salute.
In his much-anticipated inaugural speech, the 47-year-old is expected to urge American individuals and businesses to take responsibility for their actions.
It has been reported that in the course of a 20-minute address he will say that a "me first" mentality has hurt the US and contributed to the economic crisis the country faces.
"He is going to lay out a lot of the challenges we face as a country, but he will also remind ... that America has faced great challenges before," his spokesman Robert Gibbs said.
"He will talk about responsibility, particularly the great responsibility in the action of government and financial institutions, some of whose actions have got us into the mess we are in now."
The build-up to the inauguration began in earnest on Saturday when the "Obama Express" rolled into the capital following a whistle-stop tour from Philadelphia.
A high-profile concert - with performances from Bono, Bruce Springsteen and Stevie Wonder on Sunday gave way to a lower key series of community events, coinciding with Martin Luther King Day.
Despite the weight of expectation on his shoulders, the President-elect appeared relaxed as he helped renovate a "safe space" housing project for homeless and runaway youths in the capital.
With paint roller in hand, Mr Obama asked: "That's a good stroke there, what do you think?", adding: "This is good practice because I'm moving to a new house."
Meanwhile, the White House's soon-to-be former resident, in his final moments in office, commuted the prison sentences of two former border patrol guards convicted for shooting a Mexican drug dealer.
But there were no high-profile pardons of the kind that marred President Bill Clinton's last day in controversy eight years ago.
Confronting Mr Obama when he takes up residence in the White House will be an economy in deepening recession, and a country fighting wars on two fronts.
But the realities of the task ahead are likely to give way to optimism, given the historical significance of the occasion.