REUTERS - A car bomb in the northern Iraqi city of Kirkuk killed at least 25 people on Tuesday, just after U.S. troops handed over full control of Iraq's cities to the domestic security forces six years after the invasion.

The bomb, which wounded at least 40 people, struck a busy market in a largely Kurdish part of Kirkuk, a city viewed as a potential flashpoint between the Shi'ite Arab-led central government and Kurds. Police said the death toll could rise.

FR24 report: Iraqi troops prepare for US pull-out

Many Iraqis fear the U.S. pullback from towns and cities and into rural bases, the first step toward a full U.S. withdrawal by the end of 2011, leaves them open to attack.

But the government declared Tuesday a holiday, "National Sovereignty Day", and held a parade to show off the military muscle it will use against a stubborn insurgency.

"This day, which we consider a national celebration, is an achievement made by all Iraqis," Prime Minister Nuri al-Maliki said in a televised address.

"Our incomplete sovereignty and the presence of foreign troops is the most serious legacy we have inherited (from Saddam Hussein). Those who think that Iraqis are unable to defend their country are committing a fatal mistake."

Citizens and Iraqi soldiers drove around the streets of Baghdad in vehicles draped in flowers and Iraqi flags to celebrate.

In another bloody reminder of the war unleashed by the 2003 U.S. invasion, the U.S. military said four U.S. soldiers based in Baghdad had died of combat-related injuries on Monday. It gave no further details.

By midnight on Tuesday, all U.S. combat units must have left Iraq's urban centres and redeployed to rural bases, according to a bilateral security pact that requires all U.S. troops to leave Iraq by the end of 2011.