The flag of the rebel National Transitional Council was raised over the Libyan Embassy in Moscow at a ceremony on Monday, Itar-Tass reported.
Ambassador Ali Abu Bakr called on Libyans to devote their energy to building a "new, free" Libya, while supporters chanted "For a new Libya!" and "Long live freedom and democracy!"
The flag, which is identical to that of the pre-Gadhafi Kingdom of Libya, consists of a horizontal red, black and green triband decorated with a white crescent and star.
It is already flying at embassies in many other countries, including Turkey, the Czech Republic, and Mexico, according to news reports.
More than 40 countries have officially recognized the rebels, a number that is expected to grow as rebels tighten their hold on the country.
The solid green flag of the former regime was lowered from atop the embassy in Moscow last Wednesday, and Ambassador Abu Bakr announced that the embassy was throwing its support behind the rebels.
The announcement sparked a skirmish between local supporters of the former regime and those who back the rebels, the BBC Russian Service reported. No replacement flag was hoisted until this week.
President Dmitry Medvedev told journalists Wednesday that Russia would consider establishing diplomatic relations if the rebels are able to hold the country together and build a new government on democratic principles
The Kremlin's support for the uprising, which began in February, has been tepid from the beginning. Russia abstained from the UN Security Council resolution, which authorized NATO's use of force, and later accused the alliance of overstepping its mandate. Russia also acquiesced to an arms embargo while calling for peace negotiations.
In mid-July, Foreign Minister Sergei Lavrov slammed the United States and other countries that had recognized the rebel National Transitional Council, accusing them of taking sides in a civil war.
Many executives and analysts suggest that this reluctance means that Russia will lose out to Western countries in the competition for business in post-Gadhafi Libya.
Gadhafi's whereabouts are unknown, and rebels have offered a $1.7 million bounty to anyone who captures or kills him. His hometown of Sirte is the last major population center still in loyalist hands.