President Ram Baran Yadav administered oath of office to 74-year-old Koirala at Rastrapati Bhawan.
"I, Sushil Koirala, in the name of God, pledge that I will be committed and honest to the nation and its people to fulfil my duty as prime minister," said Koirala, reading the oath.
Koirala, president of Nepal's biggest political party, was elected as Nepal's Prime Minister yesterday with 405 votes in favour in the 601-member Constituent Assembly, ending months of political crisis in the country.
"The cabinet could not take full shape today as there were some differences over the issue of power sharing between the main coalition partners Nepali Congress and CPN-UML," according to party sources.
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It is understood that the differences occurred after both Nepali Congress and CPN-UML claimed for the important portfolio of Home Ministry.
However, the differences will be sorted out soon, after holding a dialogue with the UML leaders, a senior leader of the Nepali Congress said.
Later, Koirala went to his new office at Singha Durbar and met senior officials.
"The new constitution may be issued earlier also," Koirala said.
Koirala, who is unmarried, has so far not taken up any administrative post and has no experience of handling a ministry in the past.
He served six years in prison on different occasions in Nepal and India.
Koirala, the country's sixth Prime Minister since monarchy was abolished in May 2008, went to India in 1960 after the then King suspended democracy and jailed dozens, including his relatives. He stayed there for 16 years in self-exile.