At least 34 people were killed and dozens injured in gunbattles between Iraqi troops and Shiite militiamen loyal to a popular cleric in this Shiite-dominated city south of Baghdad, officials said on Monday.
The fighting broke out at about 11 pm on Sunday when Iraqi soldiers conducted raids in three neighbourhoods to flush out the militiamen and seize weapons, said army Capt Fatik Aied.
He said the fighting continued Monday with the militiamen of the Mahdi Army, which is loyal to the radical, anti-US cleric Muqtada al-Sadr.
Aied earlier said US forces came to the Iraqi army's aid on Monday, but later amended his comments to say that the Americans did not take part in the fighting but were patrolling the streets.
The US military command in Baghdad also said it cannot confirm that any American troops were involved in the clashes.
Dr Mohammed Abdul-Muhsen of the city's general hospital said 34 bodies were brought in -- 25 Iraqi soldiers, seven civilians and two militiamen.
He said at least 70 people were injured, but could not immediately give a breakdown. Fatik said the militiamen used rocket propelled grenades and automatic assault rifles. At least 10 militiamen were arrested so far, he said.
Sheik Adil al-Ansari, an al-Sadr aide based in Diwaniyah, put the blame on the army.
"It was an irresponsible act by the Iraqi army when they opened fire on the volunteers. It (the fighting) is over now and a delegation from the province will go to meet Muqtada al-Sadr " he told the agency.
"Muqtada al-Sadr ordered the volunteers to calm down, exercise self-control and resolve the problem," he said.
An indefinite vehicle ban was imposed in the city, said Adnan Abdu-Kadhim, a member of the provincial council Diwaniyah, 130 kms south of Baghdad, is a Shiite dominated city where the influence of Mahdi Army has been gradually increasing.
It already runs a virtual parallel government in Sadr City, a slum in eastern Baghdad.
But the government of Prime Minister Nouri al-Maliki, a Shiite, has found it difficult to rein in al-Sadr, whose movement holds 30 of the 275 seats in parliament and five Cabinet posts.
Al-Sadr's backing also helped al-Maliki win the top job during painstaking negotiations within the Shiite alliance that led to the ouster of Prime Minister Ibrahim al-Jaafari.
Al-Sadr mounted two major uprisings against the American-led coalition in 2004 when US authorities closed his newspaper and pushed an Iraqi judge into issuing an arrest warrant against him.
But American forces have also been wary of confronting the Mahdi Army because of al-Sadr's clout over the government and his large following among Shiites, who are in a majority in Iraq.