Two US helicopters fired at a building in the central Haifa Street area during the fighting on Wednesday, witnesses said. Black smoke poured from the building after the strikes.
The helicopters launched their attack after machinegun fire and grenade explosions echoed along the street, sending drivers and pedestrians fleeing the normally busy commercial thoroughfare on the west bank of the Tigris river.
Our correspondent reported that four Iraqi policemen were killed and 13 wounded in the fighting.
"We are in a situation of engagement with who we believe to be foreign fighters," said one US soldier turning vehicles away.
US forces have often clashed with Shia fighters in the slums of the Sadr City suburb, but daylight street battles have rarely erupted in the heart of Baghdad.
Iyad Allawi signed new
Interim Prime Minister Iyad Allawi signed the new emergency measure that gives his government wider powers to combat insurgents and foreign Islamist rebels, a source in his office said.
Before the street clashes began, several mortar rounds hit Baghdad, wounding seven people, the Interior Ministry said.
Five were hurt when two rounds struck a medical centre near the office of Allawi's Iraqi National Accord (INA) party in the western district of Mansur. Another round landed in the southern Dura district, wounding two people.
Our correspondent, quoting an INA spokesperson, said the target of the mortar rounds may have been the house of Allawi in the neighhbourhood. The mortar hit the house of the INA chief's deputy, Hani Idrees.
Meanwhile, Foreign Minister Hushiar Zibari has said the new measures empower the government to impose curfews, set up checkpoints and search and detain suspects. The measures will be temporary and will apply only in parts of Iraq.
"We are in a situation
of engagement with
who we believe to be foreign fighters"
Allawi's office said ministers would explain details of the National Safety Law later on Wednesday.
The widely anticipated decision had been delayed several times as the government, which formally took over power from the US-led occupation on 28 June, ironed out the details and consulted US officials, political sources said.
Allawi's government has said it also plans to restore the death penalty, suspended during the US-led occupation, and offer a temporary amnesty for rebels who fought the Americans.
In the southern city of Basra, our correspondent reported that an explosive device targeting a British patrol was detonated in Tiwaya intersection in the city's centre, wounding an Iraqi woman.
British forces and Iraqi police detained two persons allegedly linked to the attack. A Basra police spokesman accused former Baathists and their supporters of carrying out the explosion.