In his inauguration address he warned America it must make "hard choices" to reduce the cost of health care and the size of its financial deficit.
But later there was time to dance with his wife Michelle during the traditional night of balls that heralds the beginning of a new four-year presidential term.
The stars were out in force, and Dreamgirls star Jennifer Hudson sang for the president and first lady as they danced at the official inaugural ball.
She sang Al Green's Let's Stay Together -- Mr Obama crooned a few bars of the soul classic a year ago at a fundraiser at Harlem's famed Apollo Theatre.
Other stars included Stevie Wonder and Alicia Keys, who changed her hit Girl On Fire to sing, "He's the president and he's on fire... Obama's on fire. Obama's on fire".
The crowd joined in with We Are Young by the American band Fun.
Mrs Obama wore a custom-made Jason Wu ruby-coloured dress to the inaugural balls.
Earlier at the inauguration Beyonce had performed the national anthem, while James Taylor sang America The Beautiful and Kelly Clarkson followed with My Country 'Tis Of Thee.
Mr Obama was officially sworn in on Sunday as required by law, but the glitter of Inauguration Day was pushed forward a day as January 20 fell on Sunday this year.
It meant the grand ceremony fell on the birthday of revered civil rights leader Martin Luther King.
The president said every citizen deserved a basic measure of security and dignity, and held up healthcare and social security as that strengthen the country.
In his inaugural address at the US Capitol, Mr Obama said he rejected the belief that the country must choose between caring for the generation that built the country -- or investing in the generation that will build the future.
Struggles with Republicans over reducing the deficit and paring back costly entitlement programs loom for him in his second term.
Mr Obama promised to respond to the "threat of climate change" and lead the way on renewable energy sources.
And he declared that a decade of war was ending, the nation's economy was recovering and "America's possibilities are limitless".
He said: "My fellow Americans, we are made for this moment, and we will seize it, so long as we seize it together."
Trumpets blew fanfares and cannons fired as the country watched the president take the oath of office as the world's most powerful elected leader.
Mr Obama faces a nation riven by partisan disunity, a still-weak economy and an array of challenges abroad.
He also faces a less charmed standing on the world stage, where expectations for him had been so high four years ago that he was given the Nobel Peace Prize just months into his presidency.
The president, the first lady and daughters Sasha and Malia began the day at St John's Episcopal church, which was built in 1812 and is known as the church of presidents.
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