After taking an oath on the Koran at a solemn inauguration in the capital Kabul, he pledged to tackle the scourge of drugs and terrorism plaguing Afghanistan.
But US Vice President Dick Cheney and Defence Secretary Donald Rumsfeld, who attended the ceremony, warned extremists still wanted to wrest back control following Karzai’s historic victory in October.
Security forces threw a heavy security cordon around central Kabul to ensure the ceremony at the heavily fortified presidential palace passed off peacefully.
Inside, the audience of foreign and local dignitaries erupted in applause as Karzai, interim leader since the Taleban were ousted in 2001, kissed the Koran.
Karzai himself then swore in vice presidents Ahmed Zia Masood and Ustad Mohammed Karim Khalili.
Wearing a black lambskin hat and green robe, the US-backed leader promised in his oath to exert his efforts “towards the prosperity and progress of the people of Afghanistan”.
Addressing the audience, he said Afghanistan has left a hard and dark past behind and pledged to use his five-year term to create a “new chapter in our history” after 25 years of war.
He said October’s elections were a defeat for extremists, but warlords and drug traders all had to be disarmed.
“I must hasten to say that our fight against terrorism is not yet over, even though we have succeeded to reduce this common enemy of humanity to a lesser threat in this country,” he said.
“The relationship between terrorism and narcotics and the continued threat of extremism in the region and the world at large are a source of continued concern. A decisive victory over terrorism requires serious and continued cooperation at regional and international levels.”
Kabul residents mainly stayed at home because of the tight security and watched the swearing-in live on television.
The US vice president and defence secretary warned of the continued threat from extremism but promised continuing American support.
The US leads a force of 18,000 foreign troops in Afghanistan.
Rumsfeld told US special forces at Bagram airfield outside Kabul that the Taliban and Al-Qaeda wanted to use Afghanistan “as a base for terrorist acts around the world as they did on 9/11. But it isn’t going to happen.”
Cheney highlighted the same threat when he spoke to troops separately at Bagram, where both US leaders arrived for the inauguration.
“Freedom still has enemies here in Afghanistan,” Cheney told US forces “and you are here to make these enemies miserable,” he added to cheers.
Karzai won a landslide victory in an October 9 election that passed off without major bloodshed, despite threats from the hardline Islamic Taliban to mount attacks to derail the vote.
The Taliban continue to attack foreign and pro-government troops as well as aid workers and civilians.
Four Afghan soldiers and up to six Taliban were killed during heavy fighting involving 150 to 200 militants in southeastern Khost province on Monday night, military officials said.
Karzai is due to announce his new cabinet next week as he continues his drive to get Afghanistan back on track.
Afghanistan is still riven by tribal differences, with hugely influential warlords such as Abdul Rashid Dostum controlling large swathes of the country.
Western governments also fear a boom in opium farming is threatening to flood Europe with cheap heroin and turn Afghanistan into a virtual “narco-state”.
A recent UN report said Afghanistan now pumps out 87 percent of the world’s opium and heroin.