Another 14 people were wounded in the fighting, most of them civilians, said Najaf General Hospital administrator Ali Muqtada Muhsin.
The Thursday skirmish was the first major fighting between the Iraqi security forces and Muqtada al-Sadr's al-Mahdi Army in over eight weeks.
Al-Sadr's fighters took control of the Ghari police station, which is 250 meters (yards) from the Imam Ali Shrine, witness Muhammad Husain said. The station was looted and police cars were burned.
"We sent a quick reaction unit to assist the policemen defending the station, but they were overwhelmed by al-Sadr fighters," said Najaf Gov. Adnan al-Zurufi. "We will solve this problem as soon as possible. We will ask for the help of the Americans, if necessary."
The cleric launched his uprising against US-led occupation more than two months ago.
The clashes began overnight when Iraqi police tried to arrest militiamen on the city's streets and in the vast Shia cemetery which extends from close to the city centre.
Police and militiamen were still shooting at each other in the city centre late on Thursday morning.
Al-Sadr's militia had agreed to disarm and then withdraw from the holy city as part of a truce hammered out by Shia dignitaries last week.
Mahdi Army fighters seized control of Najaf and the adjacent shrine town of Kufa in April as part of a wider uprising across central and southern Iraq.
Hundreds of militiamen died in clashes with US troops before a ceasefire finally took hold late last week.
Earlier this week, Najaf police chief Ghalib al-Jazari threatened to crack down on the militia if it did not withdraw from the Imam Ali complex in the city centre, which is revered by Shia around the world.
A poster of al-Sadr highlights
continuing support for him in Najaf
Although the militamen have withdrawn from the rest of Najaf, paving the way for the deployment of Iraqi police, they have remained in abandoned building sites around the mausoleum.
They continue to man checkpoints at all entrances to the plaza surrounding the sacred compound.
In the southern city of Amara a child was killed and five people wounded overnight when a mortar round landed in the backyard of a house, medics said Thursday.
"A mortar round hit the yard where the family was sleeping in the Husain neighborhood, killing their son Kara Falah, 12, and leaving five people wounded," said Sad Fakhr al-Din, a doctor at the city's hospital, without specifying who fired the round.
Iraqi families often sleep outside in the summer as temperatures soar, particularly in the south and centre.