Najaf battle a crucial test for Allawi

But it is Najaf that has become the main focus of the Iraqi government, and of US forces. Tanks have sealed off the old city, and Iraqi police have arrested hundreds of men attempting to join the estimated 1,000 followers of Sadr, who are planning a last stand around the shrine and in a nearby cemetery known as the Valley of Peace.

Deferring to requests by the Iraqi government, the US Marines appeared to be preparing Iraqi troops for a siege of - or final assault on - the shrine itself to avoid inflaming Shiite feelings about US troop presence inside the shrine.

While some experts say that religious passions will be inflamed if Sadr is killed and if the shrine comes under military attack, others say that the larger problem is that Allawi has inherited a government whose major decisions continue to be made by US military commanders, and without sufficient resources to extend its own authority, legitimacy, and control.

"Since the end of the occupation, US forces have in significant measure withdrawn to barracks and reduced their tempo of operations," says Tarak Barkawi, a strategic expert at the Center for International Studies at the University of Cambridge.

"This is good in the sense of reducing their highly unpopular visibility; it is bad in that the lid is off of the insurgents or local militias, and poorly prepared Iraqi forces are left holding the ring. When they can't do so, they must call on US forces, producing further casualties and further unpopularity. This strikes me as a downward spiral."

Meanwhile in the crucial oil-port city of Basra, where 90 percent of the country's oil flows out to global markets, Sadr's Mahdi Army controls the center of the city. They took the city after British troops stopped patrolling and retreated into their bases following heavy fighting on Tuesday. The fighting left one British soldier dead and many injured. Since then the Mahdi Army have taken over the streets. The Iraqi police still there are working hand-in-hand with the rebels.

Thursday, outside the Mahdi Army's main political office in the center of Basra, groups of bearded militiamen casually wandered the streets carrying machine guns and RPGs while in the building's forecourt two policemen sat calmly smoking atop a police car.

Inside the Mahdi Army's main political office, Sadr's leading commander in the south, Sheikh Saad al-Basri, reveled in the success of a public demonstration in support of Sadr Thursday morning, which drew thousands into Basra's streets.

"We made this demonstration to show that we are not only interested in fighting but that we would prefer to settle our differences peacefully," says Mr. Basri, who is now in de facto control of Iraq's second largest city.

Playing up to a group of Iraqi journalists and a visiting Iranian television crew, Basri also denied that his militants were responsible for the recent disruption to Iraq's vital oil exports from Basra, which have cut oil exports by around half.

"Some people who sympathize with us made those threats against the pipelines," says Basri. "However we condemn those who would attack Iraq's oil."

Yet despite these statesman-like assurances, Al Basri leaves no doubt that he and his men are more than ready to fight if necessary.

"If peaceful demonstrations do not work we will take the path of Jihad in defense of our country," he says, a steady stream of heavily armed guerrillas file in and out of his office to signal their respect and loyalty by tenderly kissing his hand.

• James Brandon contributed to this report from Basra.

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