A senior Shia cleric working with coalition forces has been killed inside a mosque in the Iraqi holy city of Najaf.
Abdul Majid al-Khoei was the son of the late Grand Ayatollah al-Khoei
Abdul Majid al-Khoei returned to Iraq from exile in London only last week.
He was one of two Muslim leaders hacked to death outside the Ali Mosque, one
of the holiest sites for Shia Muslims.
The other was cleric Haider Kelidar, whom according to Arabic satellite channel
al-Jazeera, had worked for Saddam Hussein's ministry of religious affairs.
Mr Khoei, 41, was among those expected to have taken
part in a London-proposed conference on the future of Iraq after the war.
UK Prime Minister Tony Blair, who had met Mr Khoei on a number of occasions in London, said he had been "saddened and appalled" by the news.
His murder was also "strongly condemned" by US President Bush's administration. Spokesman Ari Fleischer said it was a reminder of "how dangerous the situation is inside Iraq".
The BBC's Islamic affairs correspondent, Roger Hardy, says Mr Khoei may have fallen victim to infighting within the various Shia factions.
He was poorly received in a recent trip to Iran, where Shia opponents rallied against him chanting: "Go back to America."
Some witnesses told reporters Mr Khoei had gone to the mosque with Mr Kelidar as a gesture of reconciliation.
A spokesman for the London-based al-Khoei foundation, Dr Fadhel Milani, told BBC News Online Mr Khoei had been in the mosque with four friends.
He had noticed Mr Kelidar coming under attack by a crowd and gone to help him - but was himself knifed. Both men died.
Other reports said crowds shouted abuse at the clerics, causing Mr Khoei to produce
a gun and fire shots.
Both men were then reportedly attacked by the crowd and hacked to death with swords and knives.
The Imam Ali mosque is one of the Shia's most holy sites
Mr Khoei had left Iraq 12 years ago, arriving in London during the Shia uprising against Saddam Hussein in 1991.
He was the son of the late Grand Ayatollah al-Khoei, spiritual leader of Iraq's Shia Muslims at the time of the 1991 Gulf War.
Mr Khoei had hoped to help restore order in Najaf following the downfall of the Baathist regime and was working in co-operation with the coalition.
He attended the Iraqi opposition conference in London in December where he told BBC News Online: "We are looking for a new Iraq in which everyone has a share.
"There are differences between groups but this is the main aim and we all agree with it.
"Some people think the future of Iraq will be bad for them but we want to forget the past and shake the hand of everyone."
Although Mr Khoei was usually accompanied by coalition forces, they do not enter the mosque and so were unable to rescue him, Dr Milani said.
Dr Milani said he believed Mr Khoei's association with the coalition forces had provoked the attack, saying "certain people did not want him in that role".
He said other colleagues from London would now "think twice" before returning to Iraq.
Our correspondent says Mr Khoei was one of the few people trying to establish a truly independent role, but he may have been a victim of an emerging struggle for power in southern Iraq.
Mr Blair said Mr Khoei had been "a religious leader who embodied hope and reconciliation and who was committed to building a better future for the people of Iraq".
Mr Khoei leaves four children who were brought up in Britain.