“A mortar shell fell near the stadium, there were victims,” said tribal leader Shaikh Karim al-Bakhati, a go-between between the Americans and al-Sadr, adding a suspect had been arrested.
Dr Ahmad Riyad of Ibn Nafis hospital said two people were killed and six others wounded.
The mortar attack came as hundreds of Jaish al-Mahdi (al-Mahdi Army) militia men turned in weapons as part of an arms-for-cash scheme to disarm armed forces loyal to Shia cleric Muqtada al-Sadr.
But US military authorities said it was not satisfied with the pace at which weapons were being turned in.
After the blast, interim Prime Minister Iyad Allawi toured the neighbourhood, amid hopes that the fighting between Jaish al-Mahdi and US forces was finally over.
Allawi (L) toured Sadr City after
“I am here with the shaikhs of this honourable city and I have just met with al-Sadr’s people. I am very thrilled and pleased that things are moving in the right direction and arms are being surrendered to the Iraqi government,” he said.
Elsewhere the Iraqi capital was relatively quiet with reports of two mortars being fired at a hotel used by journalists and foreign contractors on Sunday. There were no initial reports of any injuries or damage.
One mortar landed in a street close to the Hamra hotel, a fortified complex popular with Westerners, and another hit nearby a short while later.