Clashes have erupted in the city of Najaf, a day after an Iraqi mission failed to end the stand-off between Shia militias and US-led forces.
The latest round of fighting began nearly two weeks ago
Explosions were heard close to the Imam Ali shrine, controlled by forces loyal to Shia cleric Moqtada Sadr.
The fighting came as the conference to select an interim Iraqi council went on for an unscheduled fourth day.
Iraq's defence minister warned militiamen to give up within hours or face a full-scale attack.
"In the next few hours they have to surrender themselves and their weapons," Hazim al-Shalaan told a news conference in Najaf earlier on Wednesday.
He said it would be Iraqi forces that would enter the shrine - the holiest in Shia Islam. The Americans would play no role in the operation apart from providing air cover.
However, a US military spokesman said American troops would only react if attacked, and he had no information on any plan to storm the shrine.
Conference aims to choose an Interim National Council of 100 members
The council will oversee, advise and question government policy
National Council can veto orders or decrees from the Council of Ministers by a two-thirds majority
National Council can appoint replacements to the presidency in the event of death or resignation and can approve budgets
There have been similar warnings in the past which came to nothing, but the BBC's Matthew Price in Baghdad says there is growing impatience among Iraqi officials at the crisis in Najaf, which has seen Mr Sadr's forces face off US-led troops for nearly two weeks.
On Tuesday, Mr Sadr refused to see a peace delegation sent by the Iraqi conference currently meeting in Baghdad. He cited concerns over security and their status, regarding them as messengers rather than negotiators.
Iraq's interim Prime Minister Iyad Allawi has expressed his determination to restore security in Najaf as soon as possible.
"The Iraqi government will not sit idly by in the face of this insurgency. It is serious about restoring security and stability in the holy city as soon as possible," a statement issued by his office said.
It seems unlikely that Mr Sadr's men will heed the call to lay down their weapons, our correspondent says. They see themselves as the defenders of Najaf's sacred shrine and they have vowed to fight to the death.
On Wednesday morning, US troops backed by helicopter gunships began pounding militia positions in the old city. American soldiers also traded gunfire with militiamen.
In other developments:
- A mortar bomb is fired into a busy market in Mosul, killing at least five Iraqis and wounding about 20 others, police say
- At least four Iraqis are killed when their minibus is caught in a shoot-out between US forces and insurgents in Kut
- Poland's main military base in Iraq, in the town of Babylon, comes under mortar attack but there are no reported injuries, the Polish army says
- A mortar bomb hits the roof of the Iraqi foreign ministry in central Baghdad but no one is hurt, officials say.
The fighting in Najaf has threatened to overshadow the conference in Baghdad, which has been meeting since Sunday to select an interim council that will oversee the government and guide the country to direct elections.
Conference delegates have been deciding who will serve on the 100-seat council and were due to announce its composition later on Wednesday.
The conference, which includes religious and political leaders, will pick 81 candidates, while the remaining 19 will come from Iraq's now defunct governing council.
The often heated debates have exposed many of the faultlines in Iraqi politics, says the BBC's Middle East analyst Roger Hardy.
Smaller parties have accused the big political parties, including the main Shia parties and the two leading Kurdish factions, of wanting to squeeze out any rivals.