There were angry scenes at the funerals of those killed in Falluja
Thirteen Iraqis were reportedly killed when US forces opened fire on demonstrators on Monday night in the Iraqi town of Falluja.
There are conflicting reports as to what happened in the town, which lies 50 kilometres (35 miles) west of Baghdad.
US paratroopers from the 82nd Airborne Division started shooting after coming under fire from approximately 25 armed civilians mixed within a crowd of some 200 protesters outside a compound they were occupying in the town, a statement from US Central Command (CentCom) said.
But Iraqi witnesses said the protesters were unarmed and that the soldiers opened fire without warning on a peaceful crowd, which was protesting against the US forces' use of a school as their barracks.
Whoever was responsible for starting the gunbattle, the deaths of more civilians will increase the growing tension between Iraqis and the occupying coalition forces, says the BBC's Claire Marshall in Baghdad.
The incident in Falluja is the latest in a series of deadly clashes involving US troops and Iraqi protesters over the last weeks.
Earlier this month, US marines opened fire on angry demonstrators in the northern city of Mosul. Ten people are thought to have been killed in the incident.
US forces first denied responsibility for the killings, but later admitted they did shoot and kill a number of Iraqis during the protest.
In a separate incident on Tuesday, a US soldier on a civil affairs mission was shot and wounded by an unknown assailant in the centre of Baghdad, CentCom said in a statement.
American forces are reported to have entered Falluja - a conservative
Sunni Muslim city and Baath Party stronghold - for the first time two days ago.
Demonstrators had been marking Saddam Hussein's 66th birthday when the Americans opened fire, local witnesses say.
Protesters were carrying portraits of their ousted leader and Iraqi flags when they approached the school manned by US troops, they say.
It was a peaceful demonstration. They did not have any weapons. They were asking the Americans to leave the school so they could use it
Local Sunni cleric Kamal Shaker Mahmoud
A US officer at the scene, Lieutenant Colonel Eric Nantz, said the bloodshed occurred after the crowd shot into the
air, making it hard to tell if his men were under threat.
"There was a lot of celebratory firing last night," he told Reuters news agency.
"There were a lot of people who were armed and who were throwing rocks. How is a US soldier to tell the difference between a rock and a grenade?"
But a local Sunni cleric said the demonstration was peaceful.
"They did not have any weapons. They were asking the Americans to leave the school so they could use it," Kamal Shaker Mahmoud told Reuters.
According to local residents, several children were among the dead.
But US forces would be unable to account for the dead as the crowd took away the wounded and dispersed after the incident, CentCom said.
Correspondents say citizens had vowed to seek revenge during the funerals of those killed which took place on Tuesday.