Forces opened fire on Sunday at hundreds of protesters, who gathered after a British soldier shot dead an Iraqi demonstrator during clashes on Saturday.
Former soldiers had gathered to collect redundancy payments after being laid off from the Iraqi army by US occupying administrator Paul Bremer in May.
Residents in Basra said five demonstrators were wounded. Iraqi police arrived to help quell the violence and fired in the air.
They fled for shelter after being chased away by the crowd.
In Baghdad, former servicemen, awaiting payment, clashed with US soldiers after being told money would not be given out.
The ex-soldiers were waiting for their $40 compensation.
A snap protest started earlier after US troops pushed back the Iraqis lining up at the gate of a compound, waiting for payment and ordered them to cross the street.
A US soldier held an Iraqi in a headlock and said: "This is the guy causing trouble."
Demonstrations are mounting across occupied Iraq as former servicemen become more frustrated after months without payment.
On Saturday, two US soldiers were wounded in the exchange of fire in Baghdad between occupation troops and former Iraqi servicemen seeking overdue wages, said the military.
Meanwhile, confronting mounting opposition to the US role in Iraq, President George Bush vowed on Saturday to finish what he started and secure and rebuild the country.
Bush failing to win UN's backing
for Iraq resolution
At the United Nations, support was waning for a new US resolution on Iraq's short-term future, which came under fire from France, Russia and UN chief Kofi Annan.
Annan told the 15-member security council he could not accept the terms of the US draft because it did not incorporate his suggestions on how to handle the eventual transfer of political power in Iraq.
Annan said his proposal to let Iraqis form a government first, before writing a constitution and then holding new elections, could help stem the guerrilla-style attacks against the US occupation.
The latest US proposals call for writing a constitution first - a process that would take months before a "progressive" handover of political power to Iraqis could take place.
French President, Jacques Chirac, said on Saturday that "little progress" was being made on contentious issues in the new resolution.
And Russian President, Vladimir Putin, said: "We are not satisfied with the draft by our American partners, though they are trying to find a compromise."
China avoided directly commenting on the American resolution on Iraq, saying only that it was "necessary" for the United Nations Security Council to adopt a new resolution on Iraq.
Troops from Turkey
Turkey's parliament is expected to rule in the coming week on a controversial government appeal to deploy up to 10,000 military personnel in neighbouring Iraq as part of an international stabilisation force there.
Turkish PM Recep Tayyip Erdogan may make an unpopular choice
The request by the government of Prime Minister Recep Tayyip Erdogan has met bitter opposition from wide sections of the Turkish public.
In Washington, Bush sought to put a positive spin on his administration's successes in war-torn Iraq after a US arms experts said earlier in the week that no sign had yet been found of the weapons of mass destruction which had been the key premise for the war.
"Our forces know that a secure and sovereign Iraq will be a setback for terrorists, and an inspiration to all who dream of freedom in the Middle East," said Bush in his weekly radio address.
Bush stressed that 750 Iraqi citizens had completed their training by US instructors on Saturday to begin forming the first battalion of Iraq's new army.
The US-led coalition aims to create a 40,000-strong Iraqi army, with 27 battalions, over the next two years.
Separately, Poland said on Saturday it regretted earlier allegations that its troops in Iraq had found several Franco-German missiles made this year, after a strong rebuke from Chirac.
Polish and American soldiers shoulder to shoulder in Iraq
Polish Defence Minister Jerzy Szmajdzinski said he "deplored the indications concerning the date the missiles were produced," and promised an immediate and thorough investigation into the matter, but did not specifically deny the find.
"All information from the ministry spokesman concerning the seizure of Roland (short-range surface-to-air) missiles, as well as the information by the media relative to this affair were neither approved by the ministry nor by the chief of staff of the Polish military," he said in a statement.
Chirac had earlier strongly denied an announcement by the Polish defence ministry, saying a Polish patrol had found four Roland anti-aircraft missiles south of Baghdad, apparently manufactured this year.
"There cannot be any missiles there in 2003 because the missiles haven't been built for the past 15 years," he told a news conference.