Traffic jams formed, drivers tooted their horns and passengers shouted greetings as areas of Baghdad celebrated the new year on the streets for the first time since the 2003 invasion. The festivities took place against the backdrop of a month in which violent civilian deaths fell by 75 per cent compared with December 2006.

“I think it is a very healthy sign that the situation is improving,” Mohamed al-Mousawi, a traffic policeman watching in amazement, said. “I wish that all of the streets in Baghdad will be the same as this district next year, filled with happy people and no problems between the Sunni and the Shia.”

Almost immediately, however, residents of Baghdad were reminded of the fragility of the relative peace. A suicide bomber killed at least 30 people at a funeral in Baghdad. The blast also left 38 people injured.

The funeral in the Shia neighbourhood of Zayuna was of a retired military officer killed in a car bombing in Baghdad on Friday.

Suicide bombings have bucked the trend of falling violence by rising slightly since October. However, other deadly aspects of almost five years of war — such as kidnappings and mortar attacks — are down.

Data released this week showed that 481 civilians died violently in Iraq last month, compared with 1,930 who were killed in December 2006. Last month was also one of the least deadly for US soldiers since 2003, with 21 reported deaths compared with 112 the previous December.

The decline in sectarian bloodletting is attributed to a surge of 30,000 extra American troops into Iraq last year, as well as a decision by disenchanted Sunni tribes to side with the US military and the Iraqi Government against al-Qaeda, and a ceasefire by the al-Mahdi Army loyal to Moqtada al-Sadr, the Shia cleric.

However, General David Petraeus, the commander of US forces in Iraq, was keen to emphasise that the gains were tenuous and could be reversed. The statistics also showed that more civilians died overall last year than in 2006 (16,232 compared with 12,360).

The uncertainty of the lull in sectarian bloodletting and other violence was reflected in Baghdad’s new year celebrations, with a relatively safe shopping area attracting thousands, while in other neighbourhoods people cowered in their homes.

Setting off fireworks, tooting car horns and beating drums, people packed the streets of Karrada to count down the seconds to 2008. Dancing and singing with scores of friends on the back of a truck, Ahmed Jaffa, 18, was enjoying his first new year outside the Shia slum of Sadr City. “I hope one day we will be able to enjoy the same life that people of our age have in other countries,” the student said.

Parties were also held at the Sheraton and Palestine hotels in Baghdad. At the Babel Hotel in the city, free entry ensured an abundance of guests.

However, across the city in Doura, a notorious flashpoint where security is maintained by roadblocks and a heavy police and army presence, there was no sign of revelry.

Omar Arrawi, a butcher, did nothing to mark the occasion because the checkpoints outside his front door made movement after dark impossible. He also said that he was in no mood for a party after his brother was accidentally killed three months ago.

“All households in Doura are sad because everyone has lost a relative,” Mr Arrawi, 28, said. “My wish for 2008 is to sell my house and leave Iraq for Europe.”