Abdullah's multi-racial National Front (Barisan Nasional) coalition won just a simple majority in parliament, its weakest level ever, and his future as leader was in doubt.
Malaysian stocks tumbled 7 percent and the ringgit skidded on Monday as investors faced a heap of political uncertainty in the months to come.
The prime minister, dressed in traditional Malay costume, read the oath of office in the Malaysian king's imposing domed palace in the capital, surrounded by cabinet members and government officials.
Abdullah, who just four years ago led the coalition to a record election victory on a wave of hope for change, faced a bleak political future.
His aides were stunned on Sunday but unwilling to concede that he must step down. Former Prime Minister Mahathir Mohamad advised Abdullah to quit.
"He should accept responsibility," said Mahathir, who now says he made a mistake in picking Abdullah as his successor and that the current deputy premier, Najib Razak, should have taken over.
But Abdullah's deputy pledged support.
"As deputy president, I will assist the party president to face the challenges," Najib said.
Abdullah's coalition has called a special post-election meeting at 0730 GMT.
Abdullah's coalition ended up with 62 percent of federal seats, down from 90 percent -- was compounded by the fact that his own home state, the industrial heartland of Penang, fell to the opposition.
A loose alliance of three opposition parties took control of five of Malaysia's 13 states -- their most by far. They have threatened to review the multi-billion-dollar development "corridors" in states now under their control that have been the centrepiece of Abdullah's economic programme.
Malaysian states control land and water and thus can effectively scuttle federal development projects in areas under their governance.
The opposition Islamist party, PAS, scored shock victories in the northern heartland states of Kedah and Perak and easily retained power in its stronghold in northeastern Kelantan state.
PAS president Abdul Hadi Awang said Muslims would not be allowed to do anything banned by Islam, although non-Muslims would be free to do whatever their religion permitted.
A protest vote from ethnic Chinese and Indians, upset over what they saw as racial inequality in terms of business, job and education opportunities, had been expected.
The Indians were merciless, voting out the leader of the coalition's Indian component party and handing a seat to an Indian activist now in detention.
But Malays, who are all Muslims and traditionally support Barisan, completed a perfect storm for the government, giving the opposition Islamists a record vote to protest rising prices.
"I don't like Barisan Nasional," said Latipah, a 28-year manicurist in Kuala Lumpur. "I think the prime minister is indecisive, slow and confused. But I'm afraid there will be trouble now that they've lost badly."
Without a two-thirds parliamentary majority, Barisan can no longer change the constitution or make some key appointments.
Güncelleme Tarihi: 10 Mart 2008, 12:25