American warplanes have fired on militant positions close to the Imam Ali shrine in the holy Iraqi city of Najaf, eyewitnesses say.
Shia militia have been defying US-led forces for three weeks
The mosque complex is occupied by militia loyal to the rebellious Shia cleric, Moqtada Sadr.
The move comes after days of heavy fighting in the streets around the Imam Ali shrine.
Earlier, Iraqi government troops and US tanks closed in on the shrine as Iraqi leaders pledged to end the stand-off.
Interim Iraqi Defence Minister Hazim Shalaan is quoted as saying that the government is losing patience.
A spokesman for Moqtada Sadr said he was ready to negotiate with the Iraq government over the Najaf crisis.
"We are ready to negotiate to put an end to the suffering," Ali Smeisim told reporters.
But there were few clear indications whether US and Iraqi forces were preparing for a final assault on Mr Sadr's supporters.
Correspondents point out that several previous ultimatums from the US-backed Iraqi government have passed without the shrine - the holiest of Shia Islam - being damaged.
And the BBC's Alistair Leithead, in Najaf, says there has been heavy aerial bombardment of the area around the shrine, but so far there is no obvious sign of a full-scale assault.
Mr Sadr's Mehdi Army militia has been fighting American
marines surrounding the shrine for the past three weeks.
The radical cleric has not been seen in public for many days, but his supporters say he remains in Najaf, supervising operations.
Mr Shaalan told reporters: "Today, they (the Iraqi troops) complete the operation of encircling the shrine compound."
The troops would use loudspeakers to urge the
militants to evacuate the shrine, he added.
"If they don't listen to reason, then certainly there will be a very simple operation, a very simple raid. The decisive hours are near."
In other Iraq developments:
- Iraqi militants clash with British troops in the southern cities of Basra and Amara - reports speak of several killed
- A commission appointed by US Secretary of Defence Donald Rumsfeld to report on the Abu Ghraib prisoner abuse scandal says there was "chaos" at the prison
- Two Iraqi interim government ministers survive apparent assassination attempts in the capital Baghdad
- Militants who are holding Italian journalist Enzo Baldoni are demanding that Italy pull out its troops within 48 hours, according to a video broadcast by al-Jazeera TV. But the Italian government says its 3,000 soldiers will remain in the country
- A militant group is releasing Lebanese hostage Mohammad Raad, a truck driver who went missing in Iraq earlier this month, according to a video aired by Arab TV channels.
Plumes of black smoke were seen rising above Najaf on Tuesday after American planes and helicopters
fired on Mehdi Army positions overnight.
The BBC's Alastair Leithead, in Najaf, reports that the city's only hospital is treating dozens of civilians injured in the fighting, many of them children with bullet and shrapnel wounds.
He says the narrow streets around the Imam Ali shrine are gradually being destroyed block by block as the fighting goes on, and that fires rage almost continuously around the city.
Our correspondent adds that the city's ambulance service, which is doing what it can to help the injured, is finding it more and more difficult to work in the war zone or to venture into the old city where the help is most needed.
Najaf's director of health said five of his staff had been killed and more than 20 injured during the last three weeks of violence.
He blamed both sides for rounds and rockets going astray, but also said there were instances where vehicles bearing the Red Crescent had been deliberately targeted.
Meanwhile, the US military has denied causing damage to the Imam Ali shrine.
Responding to claims by the Shia militants that American fire had hit the mosque, a US statement said a rocket fired by Shia
militants had clipped the wall of the shrine.
The statement said a US aircraft saw militiamen firing the rocket from the north-east corner of the shrine.
"The rocket clipped the wall of the shrine and landed approximately 10m north of the wall. The shrine may have sustained damage due to the rocket," it said.
Serious damage to the building would enrage many of the country's majority Shias.