U.S. and Iraqi forces stepped up their campaign against insurgents in the Sunni Muslim stronghold of Samarra, killing 125 insurgents and capturing 88 during the two-day-old operation in the largest offensive since the capture of Saddam Hussein, the U.S. military said.

One U.S. soldier was killed and four wounded as about 5,000 soldiers seized the city hall, the main mosque and several key positions in the city.

Residents in most of the city began to emerge from their homes to examine the damage done by the intense fighting. The Associated Press reported bodies littered around the streets, uncollected because of people's fears of snipers.

U.S. officials say they control 70 per cent of the city.

The advance is seen as a major push to regain control of cities in the Sunni heartland, where U.S. forces have faced the strongest resistance -- before the January elections.

Iraq's defense minister Hazem Shaalan says that the operation has been a success.

"It is over in Samarra," Shaalan told the Arab television network Al-Arabiya.

He says that Iraqi forces did the majority of the fighting and that U.S. forces "only provided cover for our operations."

Some U.S. analysts say that the Samarra offensive is a chance for Iraqi forces to gain combat experience before a potential attempt at taking Fallujah, referred to by Secretary of State Colin Powell as "the tough one."

The offensive comes as militants beheaded an Iraqi construction contractor working on a U.S. military base who identified himself as Nafie Dawoud Ibrahim. The video, which was posted on a website linked to militants, showed the hostage being beheaded. His severed head was then placed on his back.

The latest execution comes as violence continued across Iraq.

• U.S. forces fired a "precision strike" on a building in the rebel-held city of Fallujah where the U.S. military said that 15 to 20 guerrillas were training for attacks.
• Car bombs in Fallujah and Mosul wounded at least three U.S. soldiers, while U.S. forces clashed with Shiite militants in Baghdad's Sadr City neighbourhood.
• A U.S. soldier was killed by small arms fire in Baghdad on Friday, the U.S. military said.
• An unidentified group has released a videotape showing a Jordanian worker being held hostage. The group has threatened to kill him unless his company pulls out of Iraq within 72 hours.
• Another group says it has taken six Iraqis, two Lebanese, and two Indonesian women hostage and is demanding the release of Indonesian cleric Abu Bakar Bashir. Bashir has been imprisoned in his home country, but has demanded that the militants release the women and says he will not accept freedom as a result of kidnapping.

With files from The Associated Press