Israeli patrols have left the West Bank town of Bethlehem, leaving responsibility for security in the town to the Palestinian Authority.
The transfer of authority did not require any redeployment of Israeli troops, since they had no fixed presence in Bethlehem. But with Palestinian police on the street Israeli troops will not be free to enter the city to arrest wanted militants as they have often done in the past.
Bethlehem mayor Hanna Nasser described the withdrawal as ceremonial.
Israel will continue to control the area around the religious site, Rachel's Tomb, as stipulated in the Oslo Accords.
The security transfer follows an Israeli troop withdrawal from much of the Gaza Strip that allowed free movement of Palestinians in the area for the first time in nearly three years.
Palestinian security forces are continuing to deploy there from the Rafah crossing on the southern border with Egypt to areas that were evacuated by the Israelis farther north.
On Tuesday, Israeli Prime Minister Ariel Sharon held closed door talks with his Palestinian counterpart, Mahmoud Abbas.
Appearing in front of television cameras before their meeting, both men said the time has come for peace and urged that the opportunity to find a solution to the long conflict not be lost.
During their talks, officials say the two leaders agreed to form joint committees on several crucial issues, including security and the release of Palestinian prisoners in Israeli custody.
Officials say that during Tuesday's talks, Mr. Sharon said Israel would allow Palestinian President Yasser Arafat to travel to the Gaza Strip from the West Bank, where he has been trapped for the past year by Israeli troops. But news reports say the Israeli leader also made it clear Israel does not intend to restore Mr. Arafat's unlimited freedom of movement.
Meanwhile, the United States announced it will provide a $30 million aid package for the West Bank and Gaza Strip for the repair of damaged roads and infrastructure caused by Israeli military incursions.