US soldiers have arrested a self-proclaimed "mayor" of Baghdad, Mohammed Mohsen al-Zubaidi.
US military officials accuse him of trying to sabotage coalition efforts to restore basic services to the war-torn capital.
Mr Zubaidi has been removed from Baghdad, the US says
A statement from the US Central Command headquarters in Qatar said Mr Zubaidi was being detained outside Baghdad after repeated warnings to stop interfering.
News of his arrest came on the eve of a key meeting to be hosted by Jay Garner, the former US general tasked with setting up an interim administration for Iraq.
Protests against US-led troops have been continuing and four soldiers were injured when they were ambushed by a gunman on Sunday.
Tension remained high following the deaths of 12 Iraqis in a series of explosions at an arms dump in Baghdad which the US said was triggered by fire from "hostile forces" while residents blamed the coalition for storing weapons in a residential area.
But there was more positive news for the US from a meeting of disparate Iraqi political groups in Madrid, who agreed that a democratic system - a goal supported by Washington - was the best plan for post-war Iraq.
In other developments:
- The US announces it has taken into custody General Hossam Mohammed Amin, the former director of Iraq's arms monitors and the six of clubs in the US "most wanted" playing card deck
- Tests are continuing on materials found which may have been used in the manufacture of chemical weapons, the Pentagon says
- US Defence Secretary Donald Rumsfeld hold talks with Gulf states and his military commanders at the start of a tour of the region
- A UK newspaper says it has found evidence of links between Saddam Hussein and al-Qaeda leader Osama Bin Laden
US officials say they have not yet decided what to do with Mr Zubaidi, who issued a statement on 17 April to say he had been elected governor of Baghdad.
He claims to have the backing of the London-based Iraqi National Congress and its leader Ahmed Chalabi but coalition officials repeatedly refused to recognise that he had any authority.
US officials say the arrest was made after Mr Zubaidi ignored warnings to stop obstructing attempts to restore basic facilities.
"Zubaidi sent letters to individuals and organisations telling them not to go back to work at utility plants (power, water, sewage) and banks, unless he approved it," their statement said.
US troops insist they must retain power in Baghdad for now
"Without authority, he purported to fire legitimate, licensed and competent power company employees and in their stead placed his deputy Ubaidi in charge of power."
Central Command said he continued to replace people working for the coalition with his own employees, even after he was told - and acknowledged - that he had no authority to do so.
The US commander of land forces in Iraq, Lieutenant-General David McKiernan, delivered a letter to Mr Zubaidi ordering him out of the Palestine Hotel, which is being used as a military base, and away from coalition forces.
But the US says he merely moved across the road to the Sheraton Hotel "and continued his subversive actions".
Deaths and injuries from the arms dump blast fuelled anti-US feeling
"Zubaidi's efforts to take political and personal advantage during this transitional period in Iraq's move to a representative government made it necessary for coalition forces to act decisively against him," the statement said.
US military officials said they were committed to helping Iraqis form their own government, but until that time the coalition was the only legitimate authority in the country.
Another move towards a new administration is scheduled for Monday with the de facto US governor of Iraq, Mr Garner, hoping for greater involvement in talks to be held in Baghdad.
The BBC's Claire Marshall in the capital says Mr Garner's first attempt to bring together possible future members of an administration was a shambles, with only 80 people turning up for the talks in Nasiriya.
It is hoped that 300 delegates will attend Monday's session, though protests are expected and key groups representing the majority Shia population may again boycott.