Soldiers surrounded buildings used by local cleric Sayyid Mahmud al-Hassani on Saturday with armoured vehicles while helicopters circled overhead.
Three US military police and two Iraqi police were killed on Thursday night in fighting in the city which US forces blamed on supporters of al-Hassani. He is a sympathiser of firebrand Shia leader Muqtada al-Sadr, who opposes the US-led occupation of Iraq.
US officers would not comment on whether they were hoping to arrest al-Hassani. His supporters said he had left his home after Thursday's shootout in which local people said eight of his followers had been killed.
After arresting one of his followers, American soldiers surrounded al-Hassani's office building, witnesses said.
The moves suggest American troops are taking a harder line against outspoken clerics, backed by militiamen armed with AK-47 assault rifles and rocket-propelled grenades, who are fiercely opposed to the occupation.
Shaikh Kathim al-Nasiri, al-Sadr's representative in Karbala, said US troops made a serious mistake, spilling Muslim blood and pressuring Shia clerics.
"The result will be very bad for the Americans. If they increase the pressure, there will be a crisis between the people of Karbala and the Americans," he said.
"(Al-Hassani) is a mixture of a criminal and a lunatic who believes he has a hotline to God"
Occupation authority official
He warned occupation forces that if they do any harm to Shia shrines in the holy cities of Karbala or Najaf, "they will face not only Shias in Iraq but Shias all over the world".
Shias are the majority in Iraq and were repressed by Saddam Hussein, a Sunni. Most Shia leaders have advocated cautious cooperation with Iraq's occupying forces in the hope of securing power in a future government.
Most attacks on US forces have occurred in the so-called "Sunni Triangle" north and west of Baghdad, but Thursday's attack in the Shia city 90km south of the capital showed increasing anti-American sentiment among the young followers of firebrand Shia clerics.
Officials in the US-led occupation authority ruling Iraq believe Hassani has 60 to 100 followers in Karbala.
"He is a mixture of a criminal and a lunatic who believes he has a hotline to God ... He had set up checkpoints in Karbala to fleece money out of people. At one point, his guys went to the governorate building with machetes and two were shot," an occupation authority official said.