Three months after the handover of power, the interim government of Iraqi Prime Minister Ayad Allawi is making most key decisions politically and militarily, while the new U.S. Embassy is increasingly deferring and acting in a supporting role, according to Iraqi and U.S. officials.

U.S. diplomats and military experts say the United States is now doing what it should have done a year ago: ceding authority to Iraqis; focusing on smaller, labor-intensive reconstruction projects to generate jobs rather than big ventures by U.S. companies; and assuming a low profile.

Allawi's interim government, meanwhile, is consolidating control over Iraqi ministries once tightly managed under former U.S. administrator L. Paul Bremer, officials say. Iraqis, for example, are allocating the nation's oil income, overseeing the struggle to restore basic government services and guiding distribution of U.S. aid.

The U.S. military is conducting fewer patrols and raids and turning over more day-to-day operations to newly trained Iraqi forces, even as the security situation deteriorates. Insurgents said yesterday they had executed a second American hostage in as many days.

"The changes, they're fundamental. Ambassador Bremer had a veto. . . . Now you have sovereign government," Finance Minister Adel Abdel-Mehdi said. "Of course, it's a weak sovereign government. But even so, the relationship has changed. There's a clear shift. Now the government is taking the initiative."

Yet, as Allawi arrives tonight in Washington for talks at the White House and Congress, Iraqi and U.S. officials express increasing concern on two counts. They are nervous about whether the recent shift is too late. "We've dug a pretty deep hole," said a Marine colonel who served in Iraq. They also are worried about whether Allawi, who was appointed by U.N. and U.S. envoys, has sufficient legitimacy among Iraqis to pull off this second phase of the transition.

"Obviously, Iraqis do not embrace this government as authentic or representative of them. From the beginning, they have tolerated it as something better than the occupation and as a bridge to an elected, more legitimate government," said Larry Diamond of Stanford University, an expert on democracy who served in the U.S.-led occupation. "Allawi may be an able man or the best politician around, but the fact that he was America's man seriously diminishes his legitimacy."

Some critics also charge that the U.S. Embassy has not relinquished control on sensitive issues involving U.S. interests, such as Iraq's amnesty offer to end the insurgency -- even to Iraqis who killed Americans. The plan was scrapped. Others suggest Washington has ceded to Allawi because he is a puppet doing its bidding. The talking points by President Bush and Allawi at the United Nations yesterday echoed each other.

The new assertiveness of the Iraqi government was prominent, U.S. officials say, when rebel cleric Moqtada Sadr's militia seized the sacred Shiite shrine in Najaf last month, a move comparable to taking over the Vatican. At crisis talks in Najaf, Allawi and the local governor mapped out a strategy. The top U.S. military official in Iraq, Gen. George W. Casey Jr., and senior U.S. diplomat Robert Ford were not invited to the table and instead sat along the wall, silent. Only afterward did the governor notice Ford and acknowledge him.

It was a far cry, Iraqi and U.S. officials say, from the 14-month occupation, when Bremer ruled with singular power and Iraqis served as advisers, at best.

"When it comes to calling the plays on the field, especially on sensitive military operations, there's only one quarterback, and his name is Allawi," U.S. Ambassador John D. Negroponte said in an interview yesterday. "Obviously, they need a lot of help, but we're working on reducing that reliance and building up their capacity. . . . In the meanwhile, there's no question who's taken the lead in terms of political leadership or with respect to military operations."

U.S. troops are still the main security force, but they are now effectively accountable to Iraqis, U.S. officials say. Casey and U.S. diplomats attend the national security meetings as "invited guests," Negroponte said in an earlier interview. And the top U.S. diplomat in Iraq attends the meetings only "occasionally," he added.

Retired Marine Lt. Col. Frank Hoffman, who recently reviewed Marine operations in western Iraq, said: "It's a real change," and unlikely to revert back.

In Samarra, a hotspot in the Sunni Triangle, the U.S. military has held back to allow Allawi to make overtures to tribal sheiks and resistance leaders. U.S. troops went in to check on police stations and help reseat the city council, missions conducted with the interim government's approval.

U.S. advisers at Iraq's ministries have also decreased -- and they now act as consultants, rather than running the ministries under the guise of advisory roles, as during the occupation, State Department officials say. The interim government now determines how to spend as much as $70 million a day generated by oil, assuming a role of Bremer's office. Adm. David Nash coordinates the revised reconstruction agenda with Deputy Prime Minister Barham Salih so more money is channeled faster into creating jobs.

The interim government still has a long way to go to gain full control, Iraqi and U.S. officials say.

Allawi's credibility is also still on the line, despite an early August poll indicating varying degrees of support from more than 60 percent of Iraqis. Some Iraqis are already expressing frustration with his leadership.

"Allawi is a good and strong figure. . . . [But] I think he failed in maintaining security and that led people to lose their trust in him," said Suhail Jasim, 35, who owns a supermarket in Baghdad.

With the first democratic elections four months away, timing is critical while political and military obstacles are mounting.

"The Iraqi government has taken a lot of positive steps -- and if only we had done this 18 months ago. But the problems are so big and we've allowed them to fester for 18 months, while Iraqi expectations have continued to rise," said Kenneth M. Pollack, a former National Security Council official now at the Brookings Institution's Saban Center for Middle East Policy. "There are now real questions about whether there are enough resources to make a difference in the time frame Iraqis are expecting."

Chandrasekaran reported from Baghdad. Staff writer Thomas E. Ricks contributed to this report.

Iraqi and U.S. officials are worried about whether Ayad Allawi, top, prime minister of Iraq's interim government, has enough legitimacy among Iraqis to complete the second phase of the transition.