Another 25 people were wounded in Thursday's fighting, reported Aljazeera's correspondent. Those killed include policemen and Mahdi Army fighters loyal to al-Sadr.
Chaos swept the southern city after the Mahdi Army took over the Ghari police station, said witnesses. The police station, some 250 metres from the Imam Ali shrine, was looted and police cars were burnt.
Al-Sadr's forces then withdrew and disappeared from the city's streets. It is unclear whether the fighting marks the end of a ceasefire mediated by Shia leader and al-Sadr's militia or resulted from a crackdown on crime.
Police and witnesses said trouble started when authorities tried to arrest some suspected thieves at the bus station near the main police headquarters. Masked attackers responded with machine-gun fire and rocket-propelled grenades.
Last week, al-Sadr agreed to send his fighters home and pull back from the holy shrines in Najaf and its twin city, Kufa, handing over security to Iraqi police. US occupation troops agreed to stay away from the holy sites and to give Iraqi security forces a chance to end the confrontation.
The clashes illustrate the chaotic situation in Iraq as the US-led occupation prepares to hand over power by 30 June.
One senior US military official, speaking on condition of anonymity, said forces would not leave the streets immediately after 30 June but would phase down their presence as Iraqi security troops gradually took control.
On the diplomatic front, Iraq's interim authorities took steps to reassure Kurdish members of their government, who have threatened to walk out of the government because the UN Security Council resolution dealing with the transfer of power failed to include an endorsement of the interim constitution.
Massud Barzani (L) and Jalal
Talabani had threatened to quit
Prime Minister Iyad Allawi's spokesman Gorgues Hermez Sada said the Iraqi government intended to honour the interim constitution known as the Transitional Administrative Law (TAL).
Sada said the interim government will adhere to this law when Iraq makes the transition to elections, expected next year.
Tensions are brewing between the occupied country's Kurds and Shia. The former feel they will be politically marginalised by the latter, despite assurances from interim leaders that the new government will preserve community rights.
UN diplomats said the decision was made to keep a reference to the TAL out of the resolution to appease Iraq's most influential Shia cleric, Grand Ayat Allah Ali al-Sistani, who grudgingly accepted the charter when it was approved in March.
Leading Kurds had threatened to pull all Kurdish ministers from the interim government.
But on Thursday, Patriotic Union of Kurdistan leader Jalal Talabani gave a qualified welcome to the UN resolution. "We are happy that the Security Council resolution mentioned federalism, but we regret that it did not mention the Kurdish people," Talabani told a television station run by his party late on Wednesday.
UN envoy for Iraq Lakhdar Brahimi, speaking in New York, said he felt Iraq's Kurds and Shia could find "common ground" in their dispute.
In related news, the Spanish branch of the humanitarian organisation Oxfam said on Thursday that the violence in Iraq made it impossible to work in the war-torn country.
Oxfam said it would use money raised for projects in Iraq for emergency relief in Burundi. Donors who sent $1 million to assist Iraq could have their money back if they preferred.