Hundreds of Iraqi civilians have been killed in the US bombing and fighting between al-Sadr's supporters and US forces and Iraqi security forces in seven Iraqi cities, unofficial sources say.
Shaikh Ahmad al-Shaibani said the raid followed about one hour of intense fighting between US troops and the Al-Mahdi Army, although he had no account yet of the casualties.
"This is a peaceful house and not a military barracks," al-Shaibani said. "We feel great anger."
Interim Prime Minister Iyad Allawi urged the Shia fighters on Thursday to lay down their arms and leave the mosque, a site revered by Muslims around the world for containing the tomb of Ali bin Abi Talib, cousin and son-in-law of Prophet Muhammad.
The US-led assault in such an important city, for all Muslims and for the Shia Muslim community in particular, could spark a firestorm for Allawi, who needs to crush the resistance that has disrupted vital oil exports and threatened to undermine his six-week-old interim government.
"This government calls upon all the armed groups to drop their weapons and rejoin society. We call upon all the armed men to evacuate the holy shrine and not to violate its holiness," Allawi said in a statement.
Defence Minister Hazem al-Shalan said 1200 "militiamen" had been captured in Najaf, "many of them non-Iraqis" who do not speak Arabic, and US-led forces had taken up positions in the city's 1920 Revolution Square.
Another 400 "militiamen" have been killed, captured or wounded in the nearby southern city of Kut, according to the minister.
Fighters loyal to Muqtada al-Sadr
say they will fight until the end
"The operations are continuing in the city (of Najaf) and will continue until the militia is forced out or they surrender to Iraqi authorities and benefit from the amnesty scheme," al-Shalaan told reporters.
"They (Al-Mahdi fighters) have defiled the sanctity of the shrine" in Najaf."
Interior Minister Falah al-Naqib added: "This a conspiracy against Iraq. This is a war on Iraq and aiming to destroy Iraq."
Meanwhile, in the southeastern city of Kut, at least 72 people were killed in US air raids and fighting between Iraqi police and the Al-Mahdi Army on Thursday, the Health Ministry said.
It added 25 people were killed in clashes in Baghdad and 21 in other cities in the past 24 hours. There were no immediate casualty figures from the Najaf offensive.
Protests broke out in Baghdad and the southern city of Basra after the start of the Najaf offensive. Demonstrators strongly denounced the war against their fellow countrymen.
Wary of igniting more anger, the US military said the assault would exclude the Imam Ali Mosque. Government officials said only Iraqi forces would disarm fighters inside.
But the Al-Mahdi Army raised the prospect of a bloody battle, vowing no surrender and saying al-Sadr was leading the defence at the shrine and vast cemetery, one of the Middle East's largest.
Iraqi supporters of al-Sadr are
outraged by the Najaf offensive
"The morale of the fighters is very high," said Ahmad al-Shibani, a senior al-Sadr spokesman in Najaf.
Earlier in the day Abd al-Hadi al-Darraji, official spokesman of al-Sadr in Baghdad, told Aljazeera that the Imam Ali shrine in Najaf was surrounded by US occupation troops.
Najaf is cut off completely and under heavy bombardment, al-Darraji said. "A shell was fired at the main entrance of the Imam Ali shrine indicating they have surrounded it," he said.
"The entire Arab and Islamic world should refuse this tyranny. They should try to work out a ceasefire immediately," al-Darraji added.
The spokesman warned that if US occupation forces entered the Imam Ali shrine or tried to capture Muqtada al-Sadr, there would be bloodshed all over the country.
Analysts also warned of a backlash even if the Imam Ali Mosque were undamaged and al-Sadr fighters beaten in Najaf.
They said resentment could pose long-term consequences for Allawi.
The Imam Ali mosque is one of
the holiest in the Muslim world
"This has the potential to be a highly destructive bout of fighting," said Gareth Stansfield, a Middle East expert at London's Royal Institute of International Affairs.
"It's not just the physical damage, it's the symbolism of the Americans being in Najaf as well that is damaging."
Al-Sadr fighters responded to the US assault in Najaf with rocket-propelled grenades and mortar bombs.
Many civilians fled the centre of the city, some escaping on carts pulled by donkeys.
Who is fighting?
Some 2000 US servicemen and 1800 Iraq security men are deployed around Najaf, a city of 600,000 about 160km south of Baghdad.
The US military said Iraqi forces were actively involved in the offensive, although witnesses said US troops were doing most of the fighting.
As news of the offensive filtered in, thousands of Iraqis took to the streets in Basra and a Baghdad district to protest.
Al-Sadr has been one of the most
most vocal critics of US presence
"Long live al-Sadr; America and Allawi are infidels," thousands of protesters in Basra chanted.
Shia cleric, Ayat Allah Ali al-Sistani, called from his bed in a London hospital for an immediate end to the fighting, aide Husain al-Shariristani said.
The latest fighting has shattered a two-month truce between US forces and one of their most vocal critics in Iraq.
US forces say they have killed 360 al-Sadr loyalists so far in Najaf. Al-Sadr's spokesmen say far fewer have died in what is the second uprising by the Shia group in four months.