The fighting erupted as US forces intensified their war against al-Sadr on Friday, sending tanks into Najaf's vast cemetery to blast guerrilla positions on sacred ground in the holy city for the first time.
At least four dead and 26 wounded - mostly civilians caught in the crossfire - had been taken to Najaf's hospital by Friday afternoon, officials there said. Many more were believed to have been killed in the cemetery, but their bodies had yet to be collected, they added.
Explosions and gunfire rocked Najaf for about six hours while fighting raged around the main police station, less than a kilometre from some of the most revered Shia shrines.
Aljazeera's correspondent reported six US tanks had entered in Thawrat al-Aishrin square near the police station since Thursday night. More tanks joined them on Friday while US helicopters flew overhead.
The fighting in Najaf prompted top Shia Muslim cleric Grand Ayat Allah Ali Sistani to call on both US forces and al-Sadr's militiamen to cease fighting and leave the holy city.
Amid the clashes, al-Sadr aides showed journalists three holes in the gilded dome of the Imam Ali mosque nearby, the most sacred Shia shrine.
Each side pointed the finger of blame at the other.
A battle has been raging at an
ancient cemetery in Najaf
"Let me make it clear we did not attack the shrine of Imam Ali," US military spokesman Brigadier General Mark Kimmitt said in Baghdad.
Gunfire and loud explosions were also heard coming from an area south of Najaf known as Bahr al-Najaf, where about 2500 US soldiers are camped in the desert.
Al-Sadr's fighters have dug in with heavy weapons on a hill overlooking Bahr al-Najaf, about 100 metres south of the shrine. Their military command post is also in this area right behind the shrine.
The fighting comes one day after Najaf's new police chief Ghalib al-Jazairi accused fighters of "terrorising" residents and asked them to leave.
Militiamen loyal to al-Sadr raided a police station on Friday in the southern city of Karbala and escaped with a cache of assault rifles, police said.
Only six people were in the police station at the time of the raid with 300 other officers out on patrol, a spokesman said.
The raid followed a similar swoop by members of al-Sadr's Mahdi militia in Najaf late on Wednesday when they stole about 100 weapons and beat up a senior officer.
Earlier, residents reported intermittent gunfire in Karbala, where US troops and al-Sadr's militia have fought intense battles this week.
Shia fighters also took over the governor's offices in al-Nasiriya, south of Najaf, and the city was tense.
Elsewhere, northeast of Baghdad, a bomb exploded in front of the house of a tribal chief, killing him and one of his daughters.
The motive for the killing in Muqdadiyah of Rakan Mughir, head of the Miahi tribe, was unclear. However, residents said he had been cooperating with occupation forces.