Tony Blair welcomed the historic statement, describing it as of "unparalleled magnitude", and said it could "create the circumstances" to revive the power-sharing assembly in Belfast.

The IRA said its members had been ordered to pursue peaceful means and not to "engage in any other activities whatsoever" - a reference to the low-level paramilitary activities which have angered not just unionists, but the London and Dublin governments. The IRA did not say it would disband.

The Sinn Féin president, Gerry Adams, at a press conference in Dublin declared the IRA statement meant the group was now committed to "purely peaceful and democratic methods" and called it "a direct challenge to the Democratic Unionist party to decide if they want to put the past behind them and make peace with the rest of the people of the island".

The DUP have reserved judgment, although an initial "holding statement" on their website from the party leader, Rev Ian Paisley, criticised the failure to declare clearly they would end all criminal activity.

It said: "Even on the face of the statement, they have failed to explicitly declare an end to their multimillion pound criminal activity and have failed to provide the level of transparency that would be necessary to truly build confidence that the guns had gone in their entirety. This lack of transparency will prolong the period the community will need to make its assessment."

The IRA said in its long-awaited statement: "The leadership of [the IRA] has formally ordered an end to the armed campaign. This will take effect from 4pm this afternoon.

"All IRA units have been ordered to dump arms. All volunteers have been instructed to assist the development of purely political and democratic programmes through exclusively peaceful means.

"Volunteers must not engage in any other activities whatsoever."

Praising the "clarity" of the IRA statement, the prime minister said: "This may be the day when finally, after all the false dawns and dashed hope, peace replaces war, politics replaces terror on the island of Ireland."

Full text of the prime minister's statement

Bertie Ahern, the Irish prime minister, said the British and Irish governments had worked for 11 years for today's outcome. He said: "The war is over, the IRA's armed campaign is over, paramilitarism is over and I believe that we can look to the future of peace and prosperity based on mutual trust and reconciliation and a final end to violence."

Mr Ahern added: "If the IRA words are borne out by the verified action it will be a momentous and a very historic development."

Mr Adams called it an "emotional day" and, flanked by senior members of Sinn Féin, spoke directly to IRA volunteers, telling them: "National liberation struggles have different phases - a time for struggle ... a time for war, and also a time to engage, to put the war behind us all - this is that time."

His fellow negotiator, Martin McGuinness, is in Washington, while the DUP's Mr Paisley is in London.

The lengthy IRA statement insisted the armed struggle was valid, and referred to the violence of the 1960s and 70s as "pogroms" against the Catholic community.

It acknowledged that many people had suffered in the conflict, including republicans, and said: "There is a compelling imperative on all sides to build a just and lasting peace."

The statement itself came in the novel form of a video of ex-prisoner Seana Walsh reading the text, rather than the usual announcement issued under the pseudonym P O'Neill. The Ulster Unionist party urged caution. The party's new leader, Sir Reg Empey, told the BBC's World at One programme it would take time to convince the people of Northern Ireland that this was more than just rhetoric. He said: "People are so sceptical, having ... been burnt so many times before."

The IRA says it will resume the arms decommissioning process, overseen by Catholic and Protestant religious leaders "in a way which will further enhance public confidence".

Although the IRA has been on official ceasefire since 1994 - save for the 1996 Canary Wharf bombing in London - the unionists have long pushed for the complete destruction of its arms cache, and an official disbanding.

Today's IRA statement followed the release last night of IRA bomber Sean Kelly by the British government "on the expectation" of a move by the terrorist group. The exact wording of the statement will now be scrutinised in Dublin, Belfast and London.

The devolved power-sharing assembly at Stormont has been suspended since 2002 over allegations of an IRA spy ring, while Sinn Féin has also been rocked by the murder of Belfast Catholic Robert McCartney and a £26m bank raid, both blamed on the IRA.

Following talks last year at Leeds Castle in Kent, an expected deal on further arms decommissioning was scuppered by a disagreement between the IRA and the DUP on photographic evidence of the act and independent witness monitoring.

Mr Paisley was this morning holding talks with the Northern Ireland secretary, Peter Hain, about the decision to free Kelly last night - a move which has outraged unionists.

Kelly benefited from early release under the Good Friday Agreement but was returned to prison last month on Mr Hain's orders for involvement in unspecified terrorist activity.

He originally received a life sentence for killing nine civilians in the bombing of a fish shop on Belfast's Shankill Road in 1993 in which his accomplice, Thomas Begley, also died.

Although the assembly remains in limbo, its most recent elections saw Sinn Féin and the hardline DUP emerge as the two largest parties representing the nationalist and unionist communities respectively, leading to the intriguing prospect of Mr Paisley and Mr Adams sharing power in Belfast under the terms of the Good Friday agreement if the body is resurrected.