A 1500-strong Iraqi force has moved into al-Madain - known also as Salman Pak - 30km southeast of Baghdad, according to an AFP correspondent embedded with the US military.
"The whole city is under control. We've secured houses where people said there were hostages. We could not find any. I don't think we'll find any," Iraqi Brigadier-General Muhammad Sabri Latif said on Monday.
The military action followed reports that Sunni fighters had abducted dozens of people and had threatened to kill them unless all Shias left the town, although details on the situation had been sketchy and contradictory.
"I think they ran away to the other side of the river. Possibly they took hostages with them. There are no signs of any killings," Latif said.
Later in the day, Major-General Adnan Thabit Al-Maryush, adviser to the Iraqi interior minister on security affairs and a commander of al-Madain operation, was killed along with his bodyguard in an attack by armed men on his house in al-Dura, south of Baghdad, Aljazeera reported quoting Iraqi police sources.
According to outgoing national security minister Qasim Dawud, the security operation in al-Madain resulted in the arrest of four anti-government fighters as well as the discovery of seven booby-trapped cars and a large ammunition dump.
Dawud told Aljazeera that an Interior Ministry elite force supported by the Iraqi police and US forces had stormed the town without opening fire or provoking clashes.
Iraqi police and special forces
rejoice as they enter al-Madain
"We have begun searching for the hostages and we are still searching the town. The next phase of the operation involves storming some sanctuaries and terrorist hiding places," he said.
As the Iraqi forces moved in, the streets were deserted, shops shuttered and most of the town's 7000 residents were hiding inside their homes fearing a military offensive.
"They (the fighters) have either left or are just lying low," US Lieutenant-Colonel Michael Johnson said. "The Iraqis have secured most of the town, from here on there will be a police presence in Salman Pak."
Johnson said Iraqi forces were pushing south of the town along the Tigris to sweep through villages in the region.
"We can call this another Falluja ... the issue is a matter of pursuing resistance fighters in Baghdad"
Abd al-Salam al-Kubaisi,
The latest incident threatened to raise sectarian tensions between the country's majority Shia, who won control of parliament in January, and the Sunnis, who have lost the privilege and power they enjoyed under the ousted government of Saddam Hussein.
Al-Madain itself is built on the ruins of the ancient city of Cestiphon.
Abd al-Salam al-Kubaisi, a member of the influential and mostly Sunni Association of Muslim Scholars in Iraq (AMS), told Aljazeera he had contacted some people in al-Madain and they confirmed there was a fierce attack on the town despite the apparent absence of fighters.
"We can call this another Falluja," al-Kubaisi said. He went on to say that the Iraqi Interior Ministry announced on 14 April that there would be an attack against al-Madain town.
"We have urged them to keep the situation calm, but they have insisted to storm this safe city with its Sunni and Shia residents. This operation is designed to foment sectarian strife in the town."
The reported hostage-taking has
heightened sectarian tensions
Al-Huriya area in al-Wihda neighbourhood was raided 22 days ago although there were no fighters there, al-Kubaisi said. Five days later, all families were thrown out.
"Therefore, the issue is a matter of pursuing resistance fighters in Baghdad," he said. "This is a US plan. Unfortunately, Iraqi National Guardsmen have been dragged into such operations."
One resident, Ahmad al-Ubaidi, told Aljazeera: "Iraqi police forces and National Guards, backed by US troops, entered the centre of al-Madain on Monday at 7am. There was no resistance at all.
"Iraqi forces have searched citizens' houses in the town but found no hostages. Iraqi police have also confiscated some light arms from the citizens. They have even taken my light weapon," al-Ubaidi said.
Al-Ubaidi added that there are no armed fighters in the town. "The area was safe and there was no resistance.
"Iraqi police forces asked me about hostages and I told them I was sure there are no hostages in the town," he said. "This information is incorrect."