U.S. aircraft and tanks pounded Shiite militia positions around a holy shrine and ancient cemetery in the city of Najaf early Friday.

The fighting came as an aide to the Shiite cleric Moqtada al-Sadr said the cleric had instructed his followers to turn over the shrine to top religious authorities in Iraq.

That move follows an ultimatum by interim Iraqi Prime Minister Iyad Allawi that threatened that al-Sadr's loyalists had one last chance to leave the shrine.

"It's a call by the Iraqi people, it's a call by the government of Iraq," Allawi said. "If he wishes to become the leader
of this country January next, there will be an election and he could be a candidate rather than go to arms and to disturbances."

U.S. tanks moved throughout the streets early Friday, and helicopter gunships shot at militants from the skies. Al-Sadr militants claimed five fighters and five civilians were killed.

Elsewhere, other militants loyal to al-Sadr set the warehouses and offices of Iraq's South Oil Company in Basra on fire. They broke into the company's headquarters and set the blazes. When firefighters arrived, militants shot at them and the emergency workers fled.

In Baghdad, explosions rocked the heavily fortified Green Zone, headquarters to Iraqi government and U.S. agencies. One mortar attack hit a building housing U.S. Embassy offices, wounding one American.

Al-Sadr's aide said the cleric asked his army militia Friday to give control of the revered Imam Ali Shrine compound to officials from the office of Grand Ayatollah Ali al-Sistani -- Iraq's top Shiite cleric.

A day earlier, Allawi had called on al-Sadr's followers to lay down their arms, evacuate the shrine and disband their militia, or Iraqi forces would storm the holy site and drive them out.

Al-Sadr rejected the ultimatum just hours later, despite the threat. An official at al-Sadr's office in Najaf said he had received a text message from al-Sadr rejecting the demands.

"Either martyrdom or victory," the message said, according to Haidar al-Tourfi.

His forces bombarded a Najaf police station with mortar fire. Several policemen died.

Week of peace efforts

These latest developments follow efforts by Iraqi officials to broker a peace in Najaf, where U.S. troops and the Mehdi Army have been battling for weeks.

Peace efforts in Najaf began in earnest on Tuesday, when a delegation of eight Iraqis from the National Conference travelled to the holy city from Baghdad to present al-Sadr with a ceasefire plan.

The plan offered al-Sadr and his fighters amnesty in exchange for their withdrawal from the shrine. They would also have to disarm.

In addition to disarming, the cleric was ordered to sign a statement saying he would refrain from future violence and release all civilians and Iraqi security forces his militants have kidnapped.

"If these conditions are not met, then the military solution will prevail," Dawoud said. "The military action has become imminent."

"Basically, patience is running out," CTV's Murray Oliver told CTV News, reporting from Baghdad.

Hopes had been high that the fighting would stop with the ceasefire on Wednesday.

The fighting had overshadowed efforts to create a new Iraqi government at a congress in Baghdad.

The four-day conference ended Wednesday with the selection of 81 members of a new National Council. The remaining 19 members will be drawn from members of the former U.S.-appointed Iraqi Governing Council.