All this, however, hinges on the U.S. military's ability to curb an insurgency that is growing more sophisticated and lethal, despite the capture of Saddam Hussein. The Americans must also persuade rival Shiite, Sunni and Kurdish communities to accept a power-sharing formula to prevent civil war.
Guerrillas - mostly from Saddam's Baath Party - have killed more American soldiers since President Bush declared major fighting over on May 1 than died in battle during the active combat phase, which began March 20.
Insurgents have also targeted the United Nations, the International Red Cross, foreign contractors, Iraqi police and others deemed to be collaborating with the occupation force.
At the same time, the occupation authority, holed up in the heavily fortified "green zone" along the Tigris River, has been unable to revive the economy - hobbled by decayed infrastructure and unemployment estimated at about 60 percent.
Congress has approved $18.6 billion to rebuild Iraq and billions more were committed at an international conference in Madrid, Spain, in October.
However, improvements have been slow. Electricity production is near or above prewar levels. But petroleum production, the key to economic revival, has lagged due to poor infrastructure and sabotage.
Many Baghdad buildings still bear the scars of war or looting. Schools have reopened and commerce is reviving. But nightly explosions and the intermittent rattle of gunfire serve as daily reminders that the capital remains unsafe.
In a major step toward Iraqi self-rule, the U.S.-led coalition plans to transfer sovereignty to a transitional Iraqi government by July and shift responsibility for security to newly - critics say hastily - trained Iraqis.
A new constitution and a democratically elected government will be in place 18 months later, according to a formula announced Nov. 15.
U.S. officials hope that will take the steam out of the insurgency as Iraqis see that governance is no longer in the hands of foreign occupation forces.
However, the insurgency and the complexity of Iraqi society could wreck those plans or produce a country far different from the administration's vision of a beacon of democracy for the Arab world.
The American commander, Lt. Gen. Ricardo Sanchez, predicts a surge of attacks next year as insurgents, most Iraqi Sunnis reinforced by perhaps a few hundred foreign fighters, try to prevent the new government from taking office.
American officials once dismissed the insurgents as "militarily insignificant." Nevertheless, the timetable for transferring power has been driven largely by the need to reduce American casualties.
Administrator L. Paul Bremer had planned for the Iraqis to draft and ratify a new constitution and hold national elections by the end of 2004. Sovereignty and the rule of the country would then revert to that new, democratic government.
But the Iraqis couldn't agree how to choose delegates to draft the constitution, raising doubts that the whole process could be completed by deadline.
For the Americans, such a delay was politically untenable. Thirteen deaths in September, 33 in October and 69 in November raised doubts in the United States over the entire Iraq mission, especially with no weapons of mass destruction to show for the sacrifice.
The issue invigorated the Democrats, whose front-runner, Howard Dean, rose to prominence largely on his anti-Iraq war stance.
Bremer rushed to Washington in November for talks with President Bush and his advisers and returned to Baghdad with a new plan to speed the power transfer.
U.S. officials dismissed suggestions they had decided to "cut and run," and the Pentagon said significant American forces would remain in Iraq until the new government was on its feet.
If the plan works, Iraqis will assume a greater role in fighting the insurgents and maintaining order. That means U.S. troops could withdraw from the cities and towns into heavily fortified strongholds, thus reducing their losses.
Much depends on Iraq's coalition-trained security forces, to number 221,000 and start providing security by September.
They will include about 35,000 troops in a new Iraqi army. However, the Pentagon has acknowledged that about one-third of the first 700-member battalion to finish training resigned before they could begin operations.
They quit because the pay - $60 a month for privates - was too low and because they feared reprisals, the Pentagon said.
Arabic-speaking journalists have heard Iraqi policemen expressing admiration for the insurgents and saying they signed up because there were no other jobs.
Some U.S. soldiers complain privately that the Iraqis seem uninterested in pursuing guerrillas aggressively. Iraqi police complain that the Americans are insensitive to Iraqi culture.
Another major challenge will be to strike a balance between the aspirations of the majority Shiite Muslim community and fears of the Sunnis - the Iraqi elite since the collapse of the Ottoman Empire in World War I.
The Shiites, who were oppressed by Saddam, are 60 percent of Iraq's 25 million people, and many see the Americans as their vehicle to power.
The Kurds, the most pro-American group and about 15 percent of the population, want to ensure they maintain autonomy in their northern strongholds.
Shiites, notably the politician Ahmad Chalabi, are among the best educated and sophisticated people in Iraq. However, the Shiite community is also strongly influenced by religious clerics, whose views and style of leadership are often alien to Western values.
Shiites are divided between those favoring a prominent political role for the clergy and those who believe clerics should simply provide moral guidance.
As a measure of Shiite clerical power, the now abandoned U.S. plan to draft a constitution before transferring power collapsed when a leading cleric, Ayatollah Ali al-Husseini al-Sistani, insisted the charter be written only by elected delegates - a process that the Americans feared would take too long.
Leading Shiites maintain that the most important clerics, foremost among them al-Sistani, are not interested in an Iran-style theocracy.
However, al-Sistani has insisted on constitutional guarantees of Iraq's "Islamic character," a term open to interpretation. Many Iraqi Shiites spent years in exile in Iran, where al-Sistani himself was born.
It is widely assumed that Iranian security agents are active, especially in the major Shiite cities of Najaf and Karbala.
Bowing to the Shiites risks offending the Sunnis, many of whom are already deeply suspicious of the coalition. Most of the fighting has been in Sunni heartland to the west and north of Baghdad.