Khanal, 61, took the oath of office and secrecy in a function held at the President`s office in Shital Niwas here.
President Dr Ram Baran Yadav administered the oath of office and secrecy to the newly elected Prime Minister.
Vice President Parmananda Jha, outgoing prime minister Madhav Kumar Nepal, Constituent Assembly (CA) chairman Subhas Chandra Nembang, various political party leaders, chiefs of security bodies and foreign diplomats were present at the ceremony.
Khanal, a nominee of Communist Party of Nepal (CPN-UML), was elected as the new Prime Minister of Nepal during a Legislature-Parliamentary session of the Constituent Assembly on Thursday.
His election came after the Maoists decided to back Khanal after the party realised that its candidate Prachanda was unlikely to get the support of parties to win the election.
Meanwhile, the oath taking ceremony of the ministers has been postponed as the two parties UCPN-Maoist and CPN-UML could not forge an agreement regarding power sharing and formation of the new Council of Ministers, Himalyan Times reported.
Nepal`s parliament voted for a new prime minister under revised election rules designed to break a deadlock that had left the country without a government since the June 30 resignation of Prime Minister Madhav Kumar Nepal under intense Maoists pressure.