Shia sources in the holy city told our correspondent on Wednesday that a possible truce - which is waiting for US approval - would include the following:
- An end to all forms of weapon possession in the city
- The handover of security to the Iraqi police
- The conversion of Shia leader Muqtada al-Sadr's Mahdi Army into a political organisation
- The formation of an Iraqi Army brigade to protect the city
- Postponement of the trial for the murder of Abd al-Majid al-Khui
The agreement would lead to the withdrawal of US forces from the city, our correspondent added.
Qais al-Khazali, Muqtada al-Sadr's chief aide in Najaf, said the agreement "represents all shades of the Shia political spectrum".
Abu Hasan Amari, head of the Badr Brigades militia - which is loyal to the rival Supreme Council for the Islamic Revolution in Iraq (SCIRI) - said the agreement was "the beginning of a solution to the crisis that endangers everyone".
But al-Sadr made conflicting remarks at a news conference immediately after the announcement of a deal.
Speaking at the Imam Ali shrine in Najaf, al-Sadr vowed to keep fighting US occupying forces in Iraq and "die as a martyr".
"If you were in my place you would do the same, fight the occupation, kick them out, fight for independence"
He added that he would not disband his militia unless religious authorities demanded it.
"Disbanding the Mahdi Army is a decision that has to be made by the high Shia religious authority," al-Sadr said, distancing himself from any mediation or negotiation efforts to end his rebellion.
"We are ready for any US escalation and don't expect otherwise from the American occupation," he said.
But al-Sadr said he was peace-loving and asked the American people to understand his desire for independence and freedom for his country.
"If you were in my place you would do the same, fight the occupation, kick them out, fight for independence," he said.
There was no initial response from the US military, which occupies a small base and other buildings in Najaf.
However, the US commander in the area, Major General Martin Dempsey, had earlier said his forces were prepared to hand over security in Najaf to a locally raised security force which could include members of al-Sadr's Mahdi Army.
Al-Sadr is accused of ordering the
murder of Abd al-Majid al-Khui
Al-Sadr's militia launched an uprising against occupation troops last month.
US officials initially vowed to kill or capture al-Sadr, but have recently backed down preferring to have Iraqis negotiate a solution.
Meanwhile, an American soldier was killed in action on Tuesday in the west of the occupied country, according to the US military on Wednesday.
A statement provided few details saying that the soldier, assigned to the 1st Marine Expeditionary Force, was killed "as a result of enemy action".
At least 773 US soldiers have died in Iraq since the invasion and occupation of the country.
Mahdi Army opposed
On Tuesday, about 400 people joined a peaceful demonstration in Najaf, demanding that al-Sadr's militia leave the city.
"We ask the religious leadership in Najaf to take al-Sadr's followers and the Mahdi Army away from the city," said Abid Turfi, one of the demonstrators.
Al-Sadr supporters held a counter-demonstration hours later.
Earlier in the day, a US Army spokesperson said US troops in Karbala killed at least 20 Iraqi militiamen loyal to al-Sadr. The official added that seven US soldiers were wounded.
But Karbala health director Falih al-Hasnawi said that not all the Iraqis killed were from the Shia militia.
Of the five bodies he saw, only "two of them were fighters from the Mahdi Army".
"Twelve people were wounded and a hotel and several houses near the Mahdi Army compound were destroyed," al-Hasnawi said.