Prime Minister Meles Zenawi and Italian undersecretary of state for foreign affairs Alfredo Mantica unveiled the 1 700-year-old treasure draped in Ethiopian and Italian flags.
Thousands of people gathered at the original site of the stele in Axum, some 575km north of Addis Ababa, cheered as the two drew down the flags from the massive monument.
Children dressed in traditional Ethiopian outfit and gladiator costumes lined up on opposite sides to greet the top officials.
"Not only are we witnessing the return of a cultural monument, but also a historical turning point in relations between Ethiopia and Italy," Mantica said after he and Meles placed a replica of the obelisk at the foot of the giant artefact.
Ethiopian President Girma Woldegiorgis said "the return of the obelisk heals the wounds suffered during the past".
Italian soldiers carted away the 24m third-century AD granite funeral stele in 1937 on the orders of then-dictator Benito Mussolini during his attempt to colonise Ethiopia.
Rejoicing among Ethiopians
Despite a 1947 agreement that called for its return, the obelisk had remained in Italy standing outside the Rome headquarters of the UN Food and Agriculture Organisation, much to the anger of Ethiopia.
Its return was finally agreed upon in talks in Italy in November 2004 between Ethiopian Prime Minister Meles Zenawi and Italian Prime Minister Silvio Berlusconi, but its arrival was then announced and delayed several times.
The last of the three pieces arrived in Axum in April 2005 to great rejoicing among Ethiopians, who regard the obelisk as a national treasure.
Axum, which dates to 100 BC and was added to the UN World Heritage List in 1980, was the capital of the Axumite kingdom that flourished as a major trading center from the fifth century BC to the 10th century AD.
At its height, the kingdom, ruled by kings who traced their lineage back to the time of David, Solomon and the Queen of Sheba, extended across areas of what are today Ethiopia, Eritrea, Somalia, Sudan and Yemen.