US officials said on Tuesday airborne gunships had killed about 57 guerrillas in a single assault against a lone anti-aircraft gun position spotted during clashes on the ground.
More than 64 Iraqi fighters had been killed in clashes around Najaf since Monday, officials said.
If confirmed, this would be the bloodiest encounter between US-led occupation troops and supporters of Shia leader Muqtada al-Sadr, who is wanted by the US-installed authorities.
Staff at two hospitals counted at least 23 dead and 34 wounded by Tuesday afternoon - but said some of the casualties did not appear to be guerrillas.
Meanwhile, a US soldier was killed when his patrol came under attack in al-Sadr City, a mainly Shia district of Baghdad.
US troops have sealed off Falluja,
which is bracing for more fighting
Elsewhere, a US helicopter was downed north of Kut as it hit an electricity pylon, an Aljazeera correspondent reported. Witnesses said a US soldier was killed in the accident.
And in Falluja, beseiged for weeks under a faltering truce, US forces re-closed the eastern gate of the city a few hours after they had opened it for families to return - a possible sign that the US is preparing to attack.
"Falluja's other gates have been closed since US troops imposed a total closure on the city," said Aljazeera correspondent Abd Al-Adhim Muhammad. "US forces have also set up sand barricades in some of the city's roads."
Despite the fighting in Najaf, al-Sadr's aide Abd Al-Karim al-Anzi said talks two weeks ago had yielded potential solutions to the status of al-Sadr's militia and an arrest warrant against him, with a final deal resting on one sticking point.
A US soldier prays in his vehicle
near the holy city of Najaf
"A solution remains probable. The US side has put forth a
condition ... Muqtada finds unacceptable. It has nothing to do with him and the Mahdi Army," Anzi said, adding that efforts were under way to revive the talks. He gave no more details.
US officials say they are not involved in talks and are merely laying out principles to those talking with al-Sadr - that his militia must disband and he must comply with an arrest warrant in connection with the murder of his rival Abd Al-Majid al-Khoei in Najaf a year ago.
Al-Anzi said the US had escalated the situation by moving troops into a base near Najaf that was vacated by Spanish forces on Monday.
Also on Tuesday, a team from the international Red Cross visited ousted and imprisoned Iraqi leader Saddam Hussein to see his condition in US custody, an American general said.
The former Iraqi president has
been held at a secret location
Brig Gen Mark Kimmitt would not say where the visit took place. Saddam has been held in an undisclosed location since his capture by US forces in December, undergoing CIA and FBI interrogation.
The International Committee of the Red Cross (ICRC) previously saw Saddam on 21 February, its first visit to the jailed former president.
"We welcome the crucial role of the ICRC," Kimmitt said, adding that the occupation authority will meet its "obligations under international law" and will continue to work with the ICRC.