US forces have been involved in heavy clashes with Iraqi gunmen in the town of Falluja, a former stronghold of Saddam Hussein's regime.
The fighting is said to have begun when a US armoured vehicle was attacked with rocket-propelled grenades and automatic gunfire.
Eyewitnesses said the Americans responded with heavy fire.
Some local residents accused the US troops of firing indiscriminately in the direction of the town centre, destroying several shops and killing two people in a pick-up truck travelling
near the scene.
"They went crazy, they fired everywhere," one witness told French news agency AFP.
Locals have accused US forces of heavy-handed tactics
Correspondents say Wednesday night's incident is likely to further raise tensions in Falluja, a predominantly Sunni Muslim town.
The town, which lies 50 kilometres (30 miles) north-west of the capital Baghdad, was the scene of clashes between US troops and local demonstrators last month in which at least 15 Iraqis died.
A subsequent grenade attack in the town wounded seven US
Captain Mike Riedmuller, the commander of the American unit occupying Falluja, said that in the latest incident, his soldiers had been attacked
with grenades and AK-47 rifles while patrolling the city.
"We were also sniped at from rooftops and returned fire for
one to two hours," he said, adding that none of his soldiers had been
He also said that the pick-up truck had rammed a US Bradley fighting vehicle, and that his soldiers had then shot
the Iraqis inside.
Tension is also high in the northern oil town of Kirkuk, where clashes between Arabs and Kurds have killed at least nine people over the last few days.
US troops backed by tanks, armoured vehicles and helicopter gunships took on Arab fighters who set up checkpoints in the town earlier this week.
One American was injured, while unconfirmed reports say several Arab fighters were killed.
Meanwhile, 200,000 followers of the Baath party have reportedly been ordered to turn themselves in immediately to coalition troops.
AFP quoted coalition radio as saying that the order applied to all "full members" of
The new head of the occupation administration, Paul Bremer, has reversed the policy of his
predecessor, Jay Garner, of working with some senior Baathists.