In December 1920 the British parliament enacted the Government of Ireland Act, providing one parliament for the six north-eastern counties of Ireland and another for the remaining 26 counties in the south. The Act also provided for a Council of Ireland to consist of 20 members from each assembly, to promote co-operation and the possibility of a future all-Ireland parliament. 

The Protestant majority in the north accepted this limited Home Rule and elected a separate parliament in May 1921, although they rejected the Council of Ireland. The partition of Ireland was, however, not accepted by the Roman Catholic minority in the north and majority in the south. Efforts to implement the new government in the 26 counties served only to solidify Sinn Féin's position. 

The guerrilla war ended with a truce on July 11, 1921. Preliminary negotiations began between De Valera and the British prime minister David Lloyd George, following which a plenipotentiary delegation representing the Dáil was sent to London, headed by Arthur Griffith and Michael Collins. 

After intense negotiations a treaty was signed on December 6, 1921, under which the 26 counties would become the Irish Free State (Saorstát na hÉireann) within the Commonwealth of Nations, with dominion status equal to that of Canada. 

A Governor-general was to be appointed to represent the British monarch, and a modified oath of allegiance was required. Although partition remained in effect, a Boundary Commission was to be established to review territorial claims. Further, Britain retained ownership of a number of ports in the Free State for defensive purposes. 

The treaty was immediately rejected by De Valera and other Sinn Féin members, largely in opposition to the oath of allegiance and the office of Governor-general. The Dáil, however, following heated debate ratified it on January 7, 1922, by a small majority of 64 to 57. 

De Valera resigned as president, and was replaced by Griffith. The pro-Treaty side formed a Provisional Government with Collins as chairman that, under the terms of the treaty, coexisted with the Dáil and was responsible for overseeing the formation of the new state, drafting its constitution and organising elections for the new assembly.