A woman was killed in clashes in Najaf after US forces surrounded the home of rebel Shia cleric Moqtada Sadr.
There had been an uneasy truce between Sadr and US forces
US armoured vehicles cordoned off the Zahra neighbourhood, reports said. The sounds of heavy gunfire, mortar shelling and grenade blasts followed.
Witnesses told AP news agency Mr Sadr was in the house at the time. US forces are now said to have withdrawn.
Mr Sadr led uprisings against coalition forces in several cities in April before a truce was agreed.
Over the last few weeks, Mr Sadr's fiery rhetoric against the US presence had softened, and he had pledged to lead a peaceful campaign of resistance.
The interim government of Iyad Allawi has also made some conciliatory moves towards Mr Sadr, who is thought to command significant sympathy among the Shia community.
The fighting in Najaf on Monday afternoon appears to have started when US troops backed by Iraqi security forces approached Mr Sadr's house - surrounded by members of his militia, the Mehdi Army.
Smoke and loud explosions were heard for about one hour.
The soldiers are now reported to have withdrawn from the area, though a spokesman for the cleric told the BBC that US troops remain in the city.
The director of the city's Hakim hospital confirmed that a woman had died. He said three people had been injured.
There has been no comment yet on the operation from the US military.
Mr Sadr's militia waged fierce battles against the US-led coalition after his paper was closed down and one of his deputies arrested in March.
A ceasefire was reached in June and last month the newspaper was allowed to resume publishing.
During truce negotiations earlier in the year, Iraqi officials had said Mr Sadr would not face arrest despite an arrest warrant issued over the murder of a rival cleric.
But the US military had previously threatened to capture or kill Mr Sadr.