His comments on Thursday are seen as a major blow to the US-led occupation authority’s plans since al-Sistani's approval is seen as crucial to getting Iraq's Shia population to back the political timetable.
The top cleric rejected the US stand that elections of any sort were impossible before 2005.
Al-Sistani "wants the Iraqi people to be consulted", the current head of the US-installed interim Governing Council, Jalal Talabani, told reporters after a meeting with him in the central city of Najaf.
"He wants elections to be held for the municipal councils as well as the legislative council," said Talabani, a pro-US Kurdish politician.
The Shia cleric's demand have highlighted the gap between US promises of post-Saddam democracy and the secretive system of indirect selection by the caucus it has created to establish a caretaker government by June next year.
Talabani also said that the plan to hand sovereignty back to Iraqis will be modified to ensure a central role for Islam after objections from al-Sistani.
There was no immediate comment from Washington.
Abandoned own plans
Abandoning its previous insistence on prior elections under a constitution approved by referendum, the occupation announced on 15 November that it would hand over power to a government designated by a transitional assembly chosen by caucuses of selected notables to be convened in each of Iraq's 18 provinces.
Al-Sistani pointed out the reality of the electoral system occupation officials have established in their haste to address mounting criticism of its prolonged occupation.
Most Shia Iraqis look to al-Sistani
for guidance on political issues
"For Ayat Allah al-Sistani, the current councils were not elected, and he has requested that the occupation forces keep their promises," said Talabani, who signed this month's agreement with the occupation administration on behalf of the interim leadership.
The administration argues that elections are impractical, whether to a legislature or a constitutional convention, because Iraq has no reliable electoral register and no census since 1970.
Ration cards as ID
It says neither will it be possible before 2005 because of the security situation and the lack of a professional Iraqi civil service to conduct it impartially.
But al-Sistani insisted that polls could still be held on the basis of the ration cards distributed to the population since 1991, to help cope with the impact of the UN sanctions imposed after Iraq's 1990 invasion of Kuwait.
The ration cards are issued by household and give only the number not the ages of household members but as a basis for a establishing a caretaker government it would be a closer approximation of democracy than the caucuses proposed by the coalition.
The ration system was administered under the supervision of the United Nations and is therefore thought to be relatively fair.
Population experts say it can also be double-checked by counting households in sample districts from aerial photographs.
Shia cleric Muqtada al-Sadr is a
vocal opponent of the occupation
In a first reaction to al-Sistani's position, the coalition said it was "listening" to all points of view expressed by Iraqis.
"We are in the process of establishing a democracy in this country, democracy is about listening to people and that's what we're doing," said its main civilian spokesman, Charles Heatly.
The opposition from Shia religious parties marked the first time the community had seriously flexed its muscles against the coalition.
The Shias, who were severely repressed under Saddam Hussein's government, had previously given the occupation a relatively easy ride.