"I resign from my post denouncing all the US terrorist operations that they are doing against this holy city," Jawdat Kadam Najim al-Kuraishi, deputy governor of Najaf, said on Thursday.
The resignation came as the crackle of machine-gun fire echoed from the southern parts of the city. Smoke could be seen from the area early on Thursday, witnesses said.
There were also reports that the occupation troops and Iraqi forces had blocked off all roads leading to the Imam Ali shrine in the heart of Najaf.
The US occupation military had earlier threatened an offensive against Shia leader Muqtada al-Sadr's Al-Mahdi army.
In turn, al-Sadr's fighters have threatened to blow up oil pipelines in southern Iraq if the US and Iraqi government forces storm the city.
Later in the day, US helicopters bombed the area surrounding the house of al-Sadr in the city.
Fighting broke out on Thursday at around 7am (0300 GMT) with the US occupation forces backed by two helicopters flying over the central Iraqi town's Shia cemetery, a stronghold of the Al-Mahdi Army.
Al-Mahdi fighters in their
stronghold around Imam Ali shrine
The nature of the fighting suggested that the occupation forces, supported by Iraqi police and national guard, had mounted a pincer movement against the fighters.
Automatic arms fire could be heard, although it was impossible to say where the shooting came from.
Plumes of smoke were visible from the historic heart of the city which holds the mausoleum of Imam Ali, revered by Shia worldwide.
US troops and Iraqi national guardsmen have been training for "major assaults" against al-Sadr's fighters, hunkered down in Najaf during seven days of fighting.
Al-Sadr has pressed his supporters to fight to the end, in a statement handed out in Najaf.
"If I die a martyr or if I am taken prisoner, I urge the Al-Mahdi army to continue to fight the occupation forces," he said.
Meanwhile Najaf's provincial governor Adnan al-Zurfi denied that the US and Iraqi forces were preparing an offensive.
He had vowed on Wednesday that US troops would not approach one of Shia Islam's holiest shrines.
"If I die a martyr or if I am taken prisoner, I urge the al-Mahdi Army to continue to fight the occupation forces"
"US forces will not enter the old city," he said.
"They must stop in Midan Square," on the edge of the district. "If we decide to go into the old city, this will be the job of Iraqi police and soldiers."
A senior US commander had said on Monday that al-Zurfi had given the marines permission to enter the Imam Ali mausoleum in their battle against al-Sadr's fighters.
Hundreds of people have been killed and wounded in the fighting that began on 5 August.