Ali al-Dabbagh, an Iraqi government spokesman said Muqtada al-Sadr's order will help restore peace.
"A large number of people will listen to Moqtada al-Sadr's call. Life will return to all of Iraq as before," Dabbagh said on Al-Iraqiya state television.
"Those who do not obey the instructions of the government and of Sadr, the government will be forced to implement the law against them."
Despite the order Iraqi troops will continue military operations in Basra, Dabbagh later told Reuters news agency.
"The operation in Basra will continue and will not stop until it achieves its goals. It is not targeting the Sadrists but criminals," he said.
James Bays, Al Jazeera's correspondent in Baghdad, said: "The big question now is whether the Madhi army fighters will obey this command because there are all sorts of factions and splinter groups in existence."
He said another key point in the order says that Mahdi army members who have been arrested but not convicted, should be released.
Al-Sadr's order comes a day after he called on Arab states to support his militia's battle against "US occupation", amid continuing clashes between armed Shia groups and Iraqi government forces.
Nuri al-Maliki, Iraq's prime minister, has personally supervised the operation in Basra against the militia groups.
He told state-owned television on Saturday that Iraqi forces would not leave "without restoring security and order".
"There are some among us who are worse than al-Qaeda. Al-Qaeda is killing innocents, al-Qaeda is destroying establishments and they [Shia fighters] also," he said.
Late on Saturday, the Baghdad military command extended the curfew in the capital indefinitely.
The curfew, which was imposed late on Thursday, was originally set to expire on Sunday at 5am (0200 GMT).
Police in Basra said on Sunday that 163 people have been killed and about 500 injured in sporadic clashes in the city between government forces and militias since Tuesday.
In the southern city of Nasiriyah, 67 people have been killed and another 137 wounded, local officials said.
|Shia fighters have continued to clash with|
Iraqi forces despite calls to surrender [AFP]
At least 10 mortars fell into Baghdad's fortified Green Zone as sporadic fighting continued overnight into Sunday.
Bays told Al Jazeera he had no evidence that a major Iraqi military operation took place in Basra.
"[Iraqi forces] are having to rely, to an extent, on air power provided by... British and American aircraft and Predator unmanned aircraft with Hellfire missiles," he said on Sunday before al-Sadr order to stand down his fighters.
Tom Holloway, British military spokesman for Iraq, told Al Jazeera that British forces in Basra had fired artillery rounds at people they had identified as opposition fighters.
"We've been firing in support of Iraqi ground forces. They've been in contact, they've requested support from the coalition and artillery on a couple of occasions has been deemed the most appropriate response."
"We use our surveillance assets and conduct a collateral damage assessment. Obviously, once we've positively identified the target we make an assessment that we are able to attack it," he said.
Holloway said that British involvement in the operation is "entirely in line with the agreements with the government of Iraq", known as operational overwatch.
Iraqi police said that eight civilians were killed and seven wounded in an air raid by US aircraft on a house in Basra on Saturday.
US forces said they had killed 48 fighters in air strikes and gun battles across Baghdad on Friday.
Scores of people are also reported to have been killed in fighting in other towns across the south of the country.
Fighting has also been reported in the central city of Karbala.
Mahdi Army targeted
The Basra crackdown is aimed at disarming the city's warring Shia militias, including the Mahdi Army of al-Sadr, as well as crushing a number of criminal gangs.
|An al-Sadr official said Iraqi troops in Baghdad|
tried to handover arms to the group [AFP]
In an exclusive interview with Al Jazeera on Saturday, al-Sadr called on the Arab League, the Organisation of the Islamic Conference and the United Nations to recognise "the Iraqi resistance".
"I appeal to these parties to add legitimacy to the resistance and to stand by, not against, the Iraqi people because the Iraqi people need Arabs as much as they need any other person," he said.
"The occupation is trying to divide Sunnis and Shias. It is trying to drive a wedge between Sadris and the Sunnis. I love the Sunnis. I am a Shia, but we are all Iraqis.
"Iraq is still under occupation and the United States' popularity is reducing every day and every minute in Iraq.
"I call, through Al Jazeera, for the departure of the occupying troops from Iraq as soon as possible."
On Thursday, al-Maliki said that Basra residents would receive a "reward" if they handed in "heavy and medium-size weapons".
Many fighters loyal to al-Sadr had rejected the al-Maliki's call to disarm, but an official from al-Sadr's bloc said Iraqi soldiers in Baghdad had attempted to hand their weapons over to him.
"We told them they should keep their arms. We gave them a Quran and they went back," Salman al-Afraiji said.