The military buildup around the southern city of Najaf on Wednesday was going ahead as an Iraqi envoy appointed by al-Sadr said the leader had asked him to convey a set of peace proposals to US officials.
Al-Sadr's supporters have been rising up against the US-led occupying forces in south and central Iraq for the last 10 days.
"Sayyid Muqtada made positive proposals to end the crisis. I cannot disclose the details. He realises that an armed confrontation is not in anybody's interest," said Abd al-Karim al-Anzi.
Al-Anzi, who met al-Sadr in Najaf on Tuesday, said he was due to meet Iraqi Governing Council members later on Wednesday to discuss the proposals before seeing US officials.
However, there was no word that the US was planning to back down in its mission to "kill or capture" al-Sadr.
Military spokesman Brigadier General Mark Kimmitt said a powerful US force was building outside Najaf.
Najaf is home to one of the holiest
Shia Muslim sites
Al-Sadr's spokesman had warned if US occupation troops invaded the city it would ignite violence across Iraq.
"At the moment they face an uprising, but if they harm al-Sadr a massive revolution will take place all over Iraq," said Qays al-Khazali.
But Shia clerics who met al-Sadr said he had hinted he would disband his militia if religious authorities told him to do so.
Al-Sadr has said he was willing to die for his campaign to end the US-led occupation, but also said he was in talks to end the uprising of his al-Mahdi Army and wanted above all to keep occupation troops out of Najaf.
US President George Bush called on al-Sadr to disband his militia, which launched an uprising this month after the occupation closed a pro-al-Sadr newspaper, detained his top aide and said he was wanted for murder.
The revolt, which took US officials by surprise, came as Sunni resistance fighters responded to a military crackdown in central Iraq by taking on US marines in full-scale street battles.
Hundreds of Iraqis and scores of occupation troops have died in the fighting, including 83 Americans killed in combat, making April the deadliest month for the US military since American and British tanks rolled into Baghdad a year ago.