We present the results of the systematic survey of X-ray sources in the central region of M31 using the data from XMM-Newton observations performed in the years 2000-2004 . The spectral properties and variability of 123 bright X-ray sources with apparent luminosities between \sim 10 ^ { 36 } and 5 \times 10 ^ { 38 } ergs s ^ { -1 } were studied in detail . The spectral properties of majority of sources in our sample have been found to be consistent with that of the low-mass X-ray binary systems . 20 sources in our sample coinside with globular clusters in M31 , four sources are supernova remnant candidates and another six sources can be classified as background AGN candidates . The spectral distribution of M31 X-ray sources , based on the spectral fitting with a power law model is clearly bimodal with a main peak corresponding to a photon index \Gamma \sim 1.75 and a shoulder at \Gamma \sim 2.0 - 2.2 extending to the soft spectral region . The spectral distribution shows clear evolution with source luminosity , characterized by its narrowing and shift of its main peak to the harder spectral region for luminosities above \sim ( 3 - 5 ) \times 10 ^ { 37 } ergs s ^ { -1 } . The spectral properties of the high-luminosity sources in our sample closely resemble those of the bright LMXB in nearby galaxies of different morphological type . The distribution of absorbing columns towards M31 sources derived from spectral analysis has a peak at N _ { H } \sim 1.2 \times 10 ^ { 21 } cm ^ { -2 } extending up to 1.3 \times 10 ^ { 22 } cm ^ { -2 } , with an average value of ( 1.52 \pm 0.02 ) \times 10 ^ { 21 } cm ^ { -2 } . More than 80 % of sources observed in two or more observations show significant variability on the time scales of days to years . The fraction of variable sources in our survey is much higher than previously reported from Chandra survey of M31 , and is remarkably close to the fraction of variable sources found in the M31 globular cluster X-ray source population . Timing analysis of several of the brightest sources reveals significant aperiodic variability in the 2 \times 10 ^ { -5 } -0.01 Hz frequency range , resembling the very-low frequency variability of the bright Galactic LMXB . About 50 % of the sources in our sample are spectrally variable . The spectral evolution of a number of sources is correlated with the level of their X-ray flux , while some sources demonstrate complex patterns of evolution on the hardness-intensity diagram . Based on the similarity of the properties of M31 X-ray sources and their Galactic counterparts , we expect most of the X-ray sources in our sample to be accreting binary systems with neutron star and black hole primaries . A total of 44 X-ray sources can be identified as probable X-ray binaries . We show that X-ray hardness-luminosity ( spectral photon index vs. luminosity ) diagrams can be an effective tool for characterising X-ray binary populations in external galaxies and classification of individual sources as neutron star and black hole candidates . Combining the results of X-ray analysis ( detailed X-ray spectra , hardness-luminosity diagrams and variability ) with available data at other wavelengths , we classify 7 % and 24 % of sources in our sample as , respectively , probable black hole and neutron star candidates .