In January the first direct shipment of American military aid to Saigon arrived. The USA also offered to train the newly established South Vietnam Army.
At the same time the situation in Diem's government deteriorated, conflicts arose between Diem and the organizations that once supported him - armed sects Cao Dai and Hoa Hao, joined by the Binh Xuyen crime organization, which organized an attack on a police headquarters in Saigon Cholon and fired mortar rounds into the grounds of the Prime Minister's Palace. Additionally a conflict was escalating between president Bao Dai and Prime Minister Diem, who seemed to be increasingly more isolated on his post. At the end of April intense fights begin between Army of South Vietnam and the Binh Xuyen, who are in result driven out of Cholon, which improved the political standing of Prime Minster Diem.
In July the foreign minister of Democratic Republic of Vietnam sent a letter to the President and Prime Minister of the South Vietnam, proposing consultations in order to discuss the problem of reunification of Vietnam by means of free general elections. The letter was given a cool reception, an opinion sis presented that South Vietnam was not bound by the Geneva Agreements and that conditions for free elections did not exist in the North. At the same time Ho Chi Minh visited Moscow and agreed to accept Soviet aid.
In October a U.S.-backed plebiscite was held, in which citizens of South Vietnam were to decide whether Bao Dai should be deposed and Diem designated Chief of State. The results (probably manipulated - 96% of 6 000 000 votes) indicated a decisive victory for Diem, who became the new president and declared the beginning of a new country - Republic of Vietnam. Diem manned his administration with members of family and close friends. The president's younger brother, Ngo Dinh Nhu became his chief advisor. Diem's style of leadership, aloof and autocratic, was to create future political problems for him despite the best efforts of his American advisors to popularize him via American-style campaigns and tours of the countryside.
In December radical land reforms begun in North Vietnam, land owners were convicted in showcase-trials before "people's tribunals". Thousands were executed or sent to forced labor camps. At the same time in South Vietnam president Diem rewarded his catholic supporters by giving them land seized from Buddhist peasants. This, and allowing the big land owners to retain their holdings disappointed the peasants, hoping for land reform, and eroded president's support among them.
President Diem begun a brutal campaign against Viet Minh in South Vietnam's countryside. Those arrested were treated badly, tortured, denied counsel, many were under the guise of "shot while attempting escape". Diem also hardened his course towards France. In the end of April the last French soldier left South Vietnam, the French High Command for Indochina was then dissolved. In 1956 slow but steady increase of the number of American soldiers in Vietnam begun, above the limit imposed by the Geneva Agreements. In July the deadline passed for the unifying elections set also by the Geneva Agreements. Diem, backed by the USA, refused to participate. In November unrests started in North Vietnam, directed against the oppressive land reforms. These unrests were put down by communist force with more than 6000 killed or deported.
The Soviet Union proposed permanent division of Vietnam into North and South, with the two nations represented separately in the United Nations. The U.S. rejected the proposal, unwilling to recognize Communist North Vietnam. In February an assassin fired a shot at President Diem, missed, but seriously wounded the Secretary of Agrarian Reform. In May president Diem visited in the USA president Eisenhower, who assured him of the U.S. support for Republic of Vietnam. However the American support for Vietnam was mainly spent for defense and security, neglecting schools, medical care or other badly needed social services in the countryside. Communist guerrillas and propagandists in the countryside capitalized on this by making simple promises of land reform and a better standard of living to gain popular support among peasants. Viet Minh guerrillas also begun a widespread campaign of terror in South Vietnam including bombings and assassinations. By year's end, over 400 South Vietnamese officials were killed.
Communists formed an organized command structure in the Mekong Delta in South Vietnam. The number of American advisors in Vietnam grew, they were divided in two organizations, MAAG with the Geneva Agreements limit of 342 soldiers, and TERM (Temporary Equipment Recovery Mission), her soldiers not accounted for the limit, although they performed virtually the same duties as the MAAG. Total number of American soldiers in Vietnam exceeds 730.