Thousands of followers of Shia cleric Muqtada al-Sadr rose up in protest on Tuesday.
In Baghdad and the southern city of Karbala, a sea of al-Sadr followers lashed out at the US-appointed Governing Council's plans to endorse federalism in the basic law to rule the country through 2005.
They also protested against the Pentagon's designation of captured leader Saddam Hussein as a prisoner of war.
In central Baghdad, thousands of al-Sadr followers chanted: "We are against those who want to divide the country and separate us."
It was a swipe at Iraq's Kurdish minority and the Governing Council which had agreed behind closed doors to adopt federalism in the fundamental law that would govern the country until 2005.
The council has sanctioned virtual autonomy for the Kurds in the oil-rich north, as it looks to finish writing the fundamental law by 1 March, according to the timeframe set by the US-led occupation for a withdrawal.
The spiritual leader of Iraq's Shia majority Sayyid Ali al-Sistani's followers have already mounted two major protests against the US transfer plans since last Thursday, the first in the southern port of Basra and the other on Monday in the capital.
Al-Sistani has threatened a general strike and mass demonstrations if the US occupying administration does not hold direct elections.
Al-Sistani's supporters have come
out in against US plans
After meeting members of the Iraqi Governing Council and the US occupying administrator for Iraq Paul Bremer, Annan indicated on Monday he would consider sending a team to advise whether national elections could be held before a US-led withdrawal.
"The stability of Iraq should be everyone's business," said Annan. "I think we have an opportunity to try and move forward."
If a UN team finds it impossible to hold quick elections, Washington is counting on al-Sistani to back off from his threats of civil disobedience.
The UN chief has said technical discussions now need to take place so the world body can decide how feasible it is to send a new mission to the war-torn country.
Annan said the UN would soon send a four-person team to evaluate the security situation on the ground, as the world body was loath to repeat the tragedy of August, when a car bomb tore apart the organisation's Baghdad offices, killing its top envoy and 21 others.
As the political battle heated up, Japanese soldiers arrived in the southeastern town of Samawa in their first overseas conflict-zone mission since World War II and a massive rotation of US troops got into full swing in northern Iraq.
A convoy of Japanese soldiers arrived at its future base in southern Iraq on Monday.
Tokyo's deployment is its most
controversial since WWII
A dozen vehicles carrying 39 soldiers arrived in Samawa, 270km southeast of Baghdad.
The unit drove to the Iraqi base from Kuwait, kick-starting Japan's most controversial military mission since 1945.
The advance unit will prepare for the deployment of a 600-strong force inside Iraq and will be stationed at Samawa alongside a Dutch battalion.
The troops will be based in the southeastern province of Muthanna for non-combat operations, such as providing medical services and water supplies, restoring war-damaged buildings and transporting material, but not weapons.
In the northern city of Mosul, soldiers from the US Army's 2nd Infantry Division arrived to take over from the 101st Airborne Division next month.
From now till June, battle-hardened US military divisions and regiments will be rotated out for fresh troops.