American troops and al-Sadr's followers also fought overnight on the outskirts of two other southern cities, Najaf and Kufa. Residents heard large explosions. One Iraqi was killed and nine others, most of them civilians, were injured, said an official at al-Furat hospital in Najaf.

American forces killed 20 to 25 "enemy" fighters in the Karbala battles, while seven coalition soldiers were wounded, a coalition official said on condition of anonymity in Baghdad. Four of the coalition soldiers returned to duty, the official said.

Much of the fighting in Karbala took place near the Mukhaiyam mosque, which has served as a base for al-Sadr's Al-Mahdi Army militia and is less than a mile from one of the holiest Shiite sites in the world, the Imam Hussein shrine.

Witnesses said American soldiers first tried to enter the mosque, but then engaged in fierce shootouts with al-Sadr followers who had repositioned in the buildings around it. Fighting lasted for several hours in the Iskan and Jamiya areas of the city.

Footage broadcast by the Fox News network, which has a reporter traveling with U.S. troops of the 1st Armored Division, showed a building on fire and a U.S. vehicle trying to knock down a wall.

Hospital officials in Karbala said they had not received any casualties, though al-Sadr's militia often does not take injured fighters to hospitals, fearing they will be arrested by U.S. forces.

On Tuesday, Iraqi leaders in Najaf said al-Sadr will end the standoff with American troops if the coalition postpones its legal case against him and establishes an Iraqi force to patrol the holy city.

However, the offer hinges on an agreement that U.S. forces pull out of the city and nearby Kufa, and al-Sadr's militia lays down its arms, the leaders said.

Al-Sadr made a similar offer earlier this month.

About 40 Iraqi political and tribal leaders, including a senior al-Sadr aide, agreed on the proposal while meeting at the most prominent shrine in this Shiite holy city. The confrontation comes as the United States tries to improve security ahead of a June 30 deadline for restoring sovereignty to Iraqis.

Earlier Tuesday, the new U.S.-appointed governor of Najaf offered to defer murder charges against al-Sadr if the young firebrand disbands his militia.

Al-Sadr has been holed up in Najaf since last month after U.S. authorities announced an arrest warrant against him in connection with the April 2003 assassination of a moderate rival cleric in Najaf.

Mansour al-Assadi, a senior tribal leader, said a proposed deal would require all armed groups to withdraw from Najaf in an effort to defuse rising tensions among rival Iraqi groups.

In exchange, murder charges against al-Sadr would be postponed until a permanent constitution is adopted next year, and he would be tried by an Islamic court.

Qays al-Khaz'ali, a senior aide to al-Sadr who attended the meeting, said the agreement will be submitted to Najaf's Shiite religious leaders for approval before becoming an official offer.

Najaf Gov. Adnan al-Zurufi said he will ask the U.S.-led administration to delay legal proceedings against al-Sadr until after the Americans transfer power to a new Iraqi administration June 30. However, the militias will have to disband and disarm, and local police will take over security of the province, al-Zurufi told The Associated Press.

Maj. Gen. Martin Dempsey, commander of U.S. forces in the Najaf area, said he urged religious, political and tribal leaders to seek a political solution to the confrontation.

Al-Sadr's forces have clashed with American, British and other occupation forces across southern Iraq and in Baghdad since the arrest warrant was announced.

Al-Sadr said Tuesday he was willing to tell his fighters to end the confrontation "if the occupation forces officially request negotiations, provided that they are just and honorable and under the supervision of religious authorities."

The Iraqi government due to take office June 30 will not be elected but appointed after consultations with U.N. envoy Lakhdar Brahimi, who is in Baghdad for meetings with Iraqi and American officials. Elections are expected by January.

Clerics loyal to al-Sadr distributed copies of a purported fatwa - or religious verdict - by Grand Ayatollah Kazim al-Haeri in which he states his support for the young cleric. Al-Haeri is al-Sadr's spiritual mentor.

Al-Haeri, who has been living in Iran since the 1980s, is the designated successor of Grand Ayatollah Mohammed Sadiq al-Sadr, Muqtada's father, who was killed by suspected agents of Saddam Hussein in 1999.

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