Mortar and tank blasts, punctuated by machine-gun fire, reverberated across Najaf's historic heart on Sunday, just a day after the US-installed government vowed to return to the offensive against the al-Mahdi Army militiamen.
Iraqi police brandishing rifles threatened to arrest journalists unless they left the city on Sunday, raising fears they were attempting to impose a news blackout.
But sources in Najaf told Aljazeera US troops and Iraqi forces had advanced from different directions towards the Old City and northern cemetery amid intense gun and mortar fire.
Smoke rose from the direction of the city's vast cemetery, north of the mausoleum of Imam Ali, one of Shia's holiest shrines, which has been a militia stronghold since a spring uprising against foreign troops.
US tanks were seen parked 200 metres from the shrine with armed US marines heading towards the Old City.
As the fresh clashes began, an al-Sadr spokesman, Ahmad al-Shaibani, called for new negotiations on the cleric's demands for a withdrawal of US-led troops from Najaf and a city government headed by the Shia religious leadership.
The renewed violence sparked angry protests at the Baghdad opening of the long-awaited national conference, hailed as Iraq's first experiment in democracy in decades.
After opening speeches by Allawi and UN envoy Ashraf Qazi, dozens of delegates leapt out of their seats, shouting: "As long as there are air strikes and shelling, we can't have a conference."
The conference was itself targeted by violence. During the break, mortar bombs exploded in the heavily fortified administrative compound around the venue, shaking the building as organisers screamed at participants to get away from the windows.
Two people were killed and 17 wounded when one mortar round struck near Haifa Street, one of the areas included in a daytime curfew imposed for the conference.