51-year-old Karzai was administered oath of office by the head of the Supreme Court, Abdul Salam Azmi, at a grand ceremony at the heavily-fortified Presidential Palace in the presence of 800 guests, including External Affairs Minister S M Krishna and US Secretary of State Hillary Clinton.
In his first public address after being sworn in for a second term, he invited his rival in the August 20 Presidential polls, Abdullah Abdullah, to join in the unity government.
The President also said that the Afghan armed forces would take over the country's security duties from the US-led NATO troops in five years.
Karzai was declared re-elected to the Presidency on November 2 by the country's independent Election Commission after Abdullah withdrew from the November 7 run-off, which was ordered following a UN-backed commission's findings that nearly a third of the votes cast on August 20 were fraudulent.
Fearing Taliban strikes during the ceremony, Afghan and NATO forces put the capital city of Kabul under heavy security net, closing the international airport and advising citizens and foreigners to stay indoors.
"I swear to uphold the Constitution of the country and protect the people of Afghanistan," Karzai said as he took the oath flanked by Vice Presidents Mohammed Fahim and Abdul Karim Khalili.
Clad in a traditional hat and colourful cape, the President vowed to defend Afghanistan's territorial integrity and independence.
Pakistan President Asif Ali Zardari and Turkey's Foreign Minister Ahmet Davutoglu were also present during the swearing-in ceremony, ahead of which new checkpoints were erected in various parts of the city to inspect vehicles.
Born on December 24, 1957 in the village of Karz in Kandahar, Karzai was first sworn in as the President of Afghanistan for a five-year term on December seven, 2004.
Karzai was a student of International Relations and Political Science at the Shimla University, from where he earned his Master's degree.
In 1982, he joined the struggle against the Soviets and became director of operations of the Afghan National Liberation Front (ANLF).
When the Taliban emerged on Afghanistan's political scene in the early 1990s, Karzai initially supported them. However, by late 1994 he had become suspicious of the movement, fearing it had been infiltrated and was controlled by foreigners, including Pakistanis and Arabs.
Karzai resigned during the civil war between the 'Mujahideen' factions and began working for a national Loya Jirga (Grand Council) which, he believed, could resolve the differences among the competing parties peacefully.
On December 5, 2001 he was elected Chairman of the Interim Administration of Afghanistan by participants at the UN-sponsored Bonn Conference and assumed charge on December 22, 2001.
On June 13, 2002, the Emergency Loya Jirga elected him President of the Transitional Government. He was elected as President on October 9, 2004, and re-elected this year.
Karzai received the Indira Gandhi Prize for Peace, Disarmament and Development in November 2006.
Krishna has termed as "significant" the re-election of Karzai and welcomed the choice made by the people of Afghanistan for a democratic way of life.
Pointing out the challenge posed by the Taliban-al Qaeda nexus, India has asked the international community to renew its long-term commitment to ensuring security and development in Afghanistan.