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S America nations found union ... in as Paraguay's president, ending more than 60 years of the Colorado Party's grip on power in the South American nation.
Mr Lugo addressed tens of thousands of Paraguayans, promising to tackle corruption and deliver land reform.
The former bishop, who was elected in April, said the task of transforming Paraguay was not "impossible".
The switch in power is the latest in a series of election triumphs by leftist or centre-left leaders in the region.
Eight Latin American leaders were among the dignitaries who attended the ceremony.
Mr Lugo, who did not wear a tie but did sport a pair of sandals, addressed the crowd in both Spanish and the Guarani indigenous language from a huge stage in front of Congress.
The 57-year-old said: "Today Paraguay breaks with its reputation for corruption, breaks with the few feudal lords of the past."
The Pope in July gave his blessing for Mr Lugo to take office, granting a waiver to remove his clerical status.
The Vatican, which opposes clergy taking political office, had until then refused to accept his resignation as bishop, arguing that serving as a priest was a lifetime commitment.
'Cancer of corruption'
Mr Lugo has indicated he will aim to steer a middle way between the kind of radical policies pursued by Venezuelan President Hugo Chavez and the centre-left course taken by the presidents of Brazil and Chile, Luiz Inacio Lula da Silva and Michelle Bachelet.
"I'm in the centre, like the hole in a poncho," he has said.
Speaking to the BBC a week before he was due to take office, Mr Lugo spoke of his priorities.
His first 100 days, he said, would be devoted to informing people about the programmes his government would have to reduce Paraguay's extreme poverty.
"We are encountering a devastated country, without institutions. The first thing we are going to demand is a return to the normal and institutional functioning of the country," he said.
There would also be, he said, "a frontal assault on corruption which is a cancer that corrodes the entire society."
The international watchdog Transparency International ranks Paraguay as one of the world's most corrupt nations.
Mr Lugo's election campaign focused heavily on the need for land reform, which he says needs to be an integrated process not merely a redistribution of land.
Another key issue for Mr Lugo's administration will be relations with Paraguay's powerful neighbour Brazil, with which it operates the giant Itaipu hydroelectric dam.
He has said he wants to renegotiate a treaty under which Paraguay sells its unused electricity back to Brazil well below market prices.
(BBC)
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