Aljazeera's correspondent reported that Al-Sadr was speaking to a large group of worshippers during Friday prayers at the Kufa mosque.
In his sermon, al-Sadr denounced the interim prime minister calling him an extension of the occupation.
"Damn him and damn the occupier," al-Sadr told the faithful, who gathered in the grand mosque in Kufa, 150km south of Baghdad.
Ban on paper ends
The Shia leader also criticised Allawi for the unbanning of the Hawza newspaper, a pro-al-Sadr publication, after former occupation administrator Paul Bremer closed it down.
"Allawi, I tell you, what right do you have to order the reopening of the Hawza paper, if you were not the one to shut it down in the first place"
Allawi ordered on Sunday the lifting of a ban on al-Sadr's weekly paper that had been imposed at the end of March on accusations of instigating violence.
"Allawi, I tell you, what right do you have to order the reopening of the Hawza paper, if you were not the one to shut it down in the first place," al-Sadr said.
Al-Sadr's loyalists launched an uprising against occupation forces in March after Spanish troops opened fire on demonstrators protesting against the closure of the paper and the detention of one of his deputies.
'No Iraq-based attacks'
Making reference to possible US plans to attack Syria or Iran, al-Sadr said he would not allow any attack on Iraq's neighbours from Iraqi territory.
He also condemned the beheading of foreign workers. Al-Sadr said the captors of the South Korean worker were not justified in beheading him.
Thousands of loyalists turned
up to hear al-Sadr's sermon
Kim Sun-Il was killed in June after Seoul refused his captors' demands to withdraw its troops from Iraq.
"If you knew politics and religion, you would not have cut off his head," said al-Sadr.
"There is no religion or religious law that punishes by beheading. True, they are your enemies and occupiers, but this does not justify cutting off their heads," al-Sadr said.
Bowing to pressure from Shia political and religious leaders, al-Sadr agreed to a truce in early June and has been largely absent from the public eye amid rumours that he may have left Iraq.
Also on Friday, retired Brigadier-General Salam Blaish was assassinated as he drove to Friday prayers in the northern city of Mosul, reported Aljazeera's correspondent.
Blaish's neighbour, who was travelling with him, was also killed in the attack.
Blaish was a nominee for a senior position in the new Iraqi army, according to Mosul residents.