With fierce fighting reported in four cities, London's Ministry of Defence confirmed the fatality on Tuesday, adding that "there are other injuries" but declined to give more details.
But the spokesman added that a Shia fighter from the al-Mahdi Army had also been killed and six more wounded – though a spokesman for the militia said five of the six were civilians.
The shooting brings the British toll in Iraq to 66. Figures for the al-Mahdi Army are not available – though the number may well be in the thousands.
Fighting erupted as darkness fell and explosions and assault rifle fire were heard across the city.
Witnesses said fighters loyal to Shia leader Muqtada al-Sadr used rocket-propelled grenades in running street battles.
British convoy hit
Earlier in the day, foreigners travelling in three British vehicles in Basra escaped with their lives after their convoy was hit by a roadside bomb, a spokeswoman for the British military said.
Witnesses said al-Sadr's fighters attacked the vehicles and that at least one of the foreigners was wounded.
Earlier, two other British vehicles were attacked by them and destroyed.
Najaf's Rasul street on Tuesday -
leading to the Imam Ali mosque
The heart of Baghdad was also engulfed in fierce fighting on Tuesday.
As a national conference carried into a third day, mortar attacks in the capital killed seven people and wounded 49 - two of them hurt when a projectile landed inside the fortified Green Zone close to where the meeting was underway.
US toll increase
A US soldier was also shot dead and a number wounded in a series of rocket-propelled grenade attacks in the Sadr City district, bringing the toll to 946 since Iraq's invasion and occupation.
Persistent gunfire, punctuated by mortar blasts, also paralysed Najaf's historic Old City as US warplanes screeched overhead and snipers took up position around the Imam Ali mausoleum.
But Ghalib al-Jazairi, Najaf's police chief, has threatened to storm the shrine "and kill each one of them" unless the al-Mahdi Army fighters disarm and leave of their own accord.
Meanwhile, in the southern city of Nasiriya, three Italian soldiers were wounded when their patrol was targeted by fighters seemingly separate to al-Mahdi Army, the ANSA news agency said.