According to the US military, fifty al-Mahdi army fighters and two US soldiers were killed in the fighting which ensued from the US advance into the area on Wednesday.
Soldiers in Humvees on Thursday called on al-Mahdi Army fighters to surrender their weapons.
The thrust marks the biggest push against al-Sadr's fighters in Baghdad.
"Sadr City residents, your government has banned all militias in Iraq. Come forward and surrender your weapons," a message in Arabic read by loudspeakers from Humvees said.
Armoured vehicles were deployed in all main streets in the suburb.
Soldiers cleared suspected explosive charges and unexploded munitions as some residents stood on pavements watching them.
US soldiers search for roadside
bombs on Falah street in the city
Sadr city is a slum of two million people where fierce fighting has broken out in the past two weeks.
The area has long been a no-go area for the US military and foreigners in Iraq. Even former Iraqi president Saddam Hussein, a Sunni Muslim, used to treat the suburb with caution.