US-led forces have surrounded the centre of Najaf in an effort to defeat a week-long uprising by Shia militants.
Shia militiamen are using the Imam Ali shrine as a refuge, US forces say
There was heavy fighting as US and Iraqi troops sealed off the city's Imam Ali Shrine where followers of radical cleric Moqtada Sadr are now barricaded.
The troops, backed by helicopters and tanks, have kept out of the holy site.
Interim Prime Minister Iyad Allawi denounced the "complete criminality" of the militants and again called for them to lay down their weapons.
In a statement read out to a news conference by a senior official, Mr Allawi said: "Our brave troops have never targeted the sacred holy shrine, but the militia have made the site a target by occupying it."
The BBC's diplomatic correspondent Jonathan Marcus says the battle for Najaf is crucial, putting the credibility of both the Americans and Mr Allawi himself on the line, particularly if Mr Sadr tries to capitalise on any assault to enrage Iraq's Shia majority.
The last thing the Iraqi government or the Americans want is a widespread Shia revolt, he adds.
Interior Minister Falah al-Naqib told the news conference that no US soldiers would enter the Imam Ali shrine, one of the most important sites in Shia Islam.
Only Iraqi police and national guardsmen would go in there, he stressed.
He condemned the recent increase of violence across the country: "This is a war on Iraq, aiming for the destruction of Iraq."
But a delayed national conference on Iraq's future will be held on Sunday despite the violence, officials said.
Defence Minister Hazim al-Shalaan said 1,200 suspected fighters - many of them non-Iraqis - had been captured in the huge cemetery which has become a key battleground in Najaf.
He also claimed several successes for the Iraqi security forces in various parts of Iraq:
- Iraqi forces repelled attacks by Sadr-related groups in Nasiriya, capturing 47 fighters.
- In Kut, 400 insurgents were defeated.
- Protests, some violent, had been staged in Amara.
- Iraqi forces isolated militants inside Baghdad's Sadr City area by blocking exits; 300 explosive devices were found.
- Elsewhere in Baghdad, safe houses used by former Baathists were attacked and the leader of a "dangerous group" was arrested.
US and Iraqi troops have been battling the militants in Najaf - about 160km (100 miles) south of Baghdad - for the past seven days.
Early on Thursday, 2,000 US marines and 1,800 Iraqi soldiers engaged about 1,000 Sadr supporters.
The militants were forced back behind the walls of the nearby Imam Ali shrine, whose entrances are now blocked by US marines.
Sadr supporters in Basra protested against the Najaf offensive
Reports quote witnesses as saying that Mr Sadr's home was raided by US forces, but he was not there.
The two sides exchanged heavy fire near the house. It was unclear whether Mr Sadr was inside.
US troops, using loudspeakers, have been warning residents to leave central Najaf since Wednesday.
A correspondent for French news agency AFP said all civilians appeared to have left the area, which he described as a "ghost city".
A senior aide to Mr Sadr, Ahmed al-Shibani, said the Mehdi militia would continue to fight.
Iraq's most influential Shia figure, Ayatollah Ali al-Sistani, has urged the militiamen and US forces to show restraint and expressed his sadness at the fighting.
The number of casualties in a week of fighting in Najaf is unclear.
The US military says it has killed hundreds of militiamen - but Mr Sadr's forces say their losses are much lower.
In Kut, another Shia city 160km (100 miles) east of Najaf, US planes targeted the Mehdi militia overnight.
Iraqi government officials in Kut said at 72 people had been killed and about 150 wounded in the past 24 hours, mostly during the air raid.
Further south, in Basra, thousands of supporters of Mr Sadr held a protest against the Najaf offensive on Thursday.
His militia has also threatened to destroy oil pipelines in the south.
Elsewhere in Iraq, two US marines were reported killed in a helicopter crash in Anbar province, west of Baghdad, late on Wednesday.