Lee, 52, and the new cabinet including his father and predecessor Goh Chok Tong took their oaths in an evening ceremony at the Istana presidential palace after a carefully orchestrated succession process unique to Singapore.

Lee, a Western-educated mathematician, computer whiz and former military officer, replaced economist Goh, 63, who stepped down after 14 years to become senior minister, second in rank only to the prime minister.

Lee, Singapore's third prime minister, paid tribute to Goh in his inaugural address after receiving a vigorous handshake from his father on a red-carpeted stage set in the lush gardens of what was once the home of British colonial governors.

He vowed to continue Goh's policy of opening up Singapore society, which is admired widely for its order and affluence but often criticised for rigid social controls and strict limits on political expression.

"We will continue to expand the space which Singaporeans have to live, to laugh, to grow and to be ourselves," said Lee, who took his oath before Chief Justice Yong Pung How in a dark suit with the floodlit palace and a red-and-white Singapore flag as the backdrop.

"Our people should feel free to express diverse views, pursue unconventional ideas or simply be different. We should have the confidence to engage in robust debate so as to understand our problems, conceive fresh solutions and open up new spaces."

The elder Lee, who turns 81 next month, was moved from senior minister to a primarily advisory role in the cabinet with the newly-created title minister mentor, but is still ranked third in official protocol.

Lee was in power for three decades including the 1965 breakaway from Malaysia which led to Singapore's independence. He stepped down in 1990 to give way to Goh, who in turn named Lee's son as his deputy and presumed heir.

After Thursday's handover, Goh told local television that "over time you will see a much better Singapore" under Lee, adding "I am very happy that I have achieved what I set out to do, and now it's somebody else's turn and very importantly, that somebody else has my and Singapore's full confidence."

In recent years, the young Lee, who was also finance minister and chairman of the central bank, took the lead role in redirecting the economy to high-end manufacturing and forcing local banks to consolidate in order to be more competitive internationally.

Economists expect no major change in policies with Lee remaining finance minister and Goh taking over the central bank in the new reshuffle.

In an address before the oath-taking, President S. R. Nathan underscored the importance of Singapore's tradition of orderly political self-renewal, but told the new cabinet to listen to young Singaporeans.

"Mr Lee and his government must engage the young on external and domestic issues which affect their future, and update policies to reflect the aspirations of a younger generation of Singaporeans and adapt their style to stay in tune with the times," he added.

The new prime minister took over after a carefully orchestrated succession process seen as key to the city-state's economic success.

Despite complaints about lack of democracy, the stable political climate and consistent policies have attracted 6000 multinational corporations to operate in Singapore, Southeast Asia's richest economy with a per-capita income of US$22,000, 93 percent home ownership and first-class business infrastructure.

Lee, a former armed forces brigadier general educated in Cambridge and Harvard, had long been groomed to lead Singapore after growing up in the shadow of his authoritarian father, a feared political warrior who demolished a string of political opponents in his long career.

The ruling People's Action Party has been in power since 1959, and holds all but two of the 84 seats in parliament after winning successive elections on a platform of political stability and economic prosperity.

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