His inauguration solidified the left's dominance of South American politics but also signaled its coexistence with pro-market policies that have fueled growth in countries such as neighboring Brazil.
The 74-year-old president promised to maintain social welfare programs and improve education services to the most needy upon being sworn in by his wife, who is a senator and also an ex-member of the Tupamaros urban guerrilla movement.
But Mujica, who defeated conservative former President Luis Lacalle in a November election, remained firm on fiscal discipline.
"Macroeconomics has rules that are unpleasant but necessary," he said during the swearing-in ceremony at the nation's Congress. "Fiscal resources are limited and social needs are infinite." He faces the challenge of controlling state spending, which helped his predecessor, Tabare Vazquez, develop popular social programs, while spurring an agriculture-based economy that has grown more than 7 percent annually over the last four years.
Vazquez, the country's first socialist leader, used a mix of pro-investment policies and social programs to push unemployment to its lowest level in decades.
Mujica, who is know for his blunt style that appeals to working class voters, spent 14 years in jail for his involvement with the Tupamaros, who carried out robberies, political kidnappings and bombings in the 1960s and 1970s.
He convinced voters that he was a pragmatist who had turned the page on his militant past, portraying himself as closer to Brazil's moderate leftist President Luiz Inacio Lula da Silva than Venezuela's socialist Hugo Chavez.
Chavez has nationalized large parts of the Venezuelan economy and is openly hostile toward Washington.
Before the inauguration Mujica held a joint press conference with US Secretary of State Hillary Clinton.
