Spokesman for the US-led occupation administration, Dan Senor, said on Thursday that the military would gradually hand over responsibility for security to the Iraqi police.
Speaking at a press conference in Baghdad, Senor confirmed US forces would "suspend offensive operations but will continue to provide security by carrying out presence patrols" and will "retain the inherent right to self-defence."
Shia clerics in Najaf are believed to have played a major role in trying to end the fighting, pushing cleric Muqtada al-Sadr to offer terms for withdrawal of his Mahdi Army militia.
The cleric agreed to end all armed demonstrations in the city, evacuate all government buildings, withdraw from the city all Mahdi army fighters who are non-Najaf residents, and the opening of talks with Shia leaders on disbanding the Mahdi Army.
For their part, the US agreed to suspend the warrant for his arrest in connection with another cleric's murder holding out the possibility of its eventual dissolution.
The truce struck between al-Sadr and occupation forces was greeted with cautious relief by the embattled residents.
The al-Sadr crisis has crippled the economy of this ancient city which depends on the flow of foreign pilgrims to its sacred sites.
The Mahdi Army's grip on the city centre and the shrine has angered many residents and prompted those loyal to Najaf-based senior religious leader Grand Ayat Allah Ali al-Sistani to ask the militia to leave.
"We have received no orders to withdraw, only to put away our weapons for now as negotiations go on"
militia commander in Najaf
There were significantly less militiamen in the centre of town but the Mahdi Army remained in firm control.
Black-clad fighters could still be seen stationed on rooftops and at the entrances of all the main roads leading to the shrine.
"We have received no orders to withdraw, only to put away our weapons for now as negotiations go on," said Abu Faris, a militia commander near the shrine.