Coalition warplanes have been attacking a large convoy of tanks and armoured personnel carriers heading south-east from Basra towards the al-Faw peninsula.
British troops are in position around Basra
BBC correspondent Clive Myrie is close to the area and says the movement of Iraqi armour may be a counter-attack to recapture ground lost over the last two or three days - or possibly a tactical retreat from Basra because of the possibility of an uprising in the city.
British radar spotted the column of between 70 and 120 vehicles following the coast road along the Shatt al-Arab waterway and a number of fighter jets were scrambled to engage the column.
British troops are positioned along the coast road as well as around Basra, amid reports of an uprising in the city. Those reports have been dismissed by the Iraqis.
British forces said most resistance in Basra came from paramilitaries loyal to Saddam Hussein rather than from the regular army.
But UK troops have been reluctant to enter Basra aggressively because of the risk to civilians.
A reporter in Basra for Qatar-based television station al-Jazeera said "there are no signs of the reported uprising".
Baghdad dismissed claims that a rebellion was under way as "lies".
In London, UK Defence Secretary Geoff Hoon conceded that the situation inside the city was "unclear".
Raising humanitarian concerns, the Red Cross said it had been unable to get medical supplies to Basra's wounded civilians.
Only half of the city's water supply was working, it said.
UK Prime Minister Tony Blair told parliament that any offer of help to rebels would be decided by commanders on the ground.
He said it was essential not to encourage uprisings to take place too soon.
"We've got to be careful we know we have the support in place, [and are] able to help them before we encourage them to do things that may lead to their death," he said.
But while the extent of the reported rebellion remained uncertain, Mr Blair said it was clear that Iraqis would "opt for freedom rather than repression" once they knew Saddam Hussein's rule was coming to an end.