The US-led coalition has intensified its pursuit of radical Shia cleric Moqtada Sadr who is holding out with his militia in the holy city of Najaf.
Mr Sadr's militia has been outlawed by the US along with its leader
Thousands of troops have sealed off the city and the US is handing out leaflets portraying Mr Sadr as a criminal.
Aides to the cleric say he has dropped all his main demands and plans to turn his militia into a political movement.
President Bush has vowed to stay the course as more foreign nationals flee Iraq after a spate of abductions.
People in Najaf, south of Baghdad, were stocking up on fuel and food as about 2,500 American troops tightened their "exclusion zone" outside with the help of Polish and Spanish troops.
Mr Sadr is staying close to the city's Imam Ali shrine, sacred to the world's Shia Muslims.
Gen Richard Myers, America's top soldier, arrived in Iraq on Wednesday after telling reporters in neighbouring Kuwait that Mr Sadr "must be brought to justice".
"It may well be if he is captured, violence could
increase for a bit but I think it would be very temporary," he added.
Elsewhere, Iraqi militants released French journalist Alexandre Jordanov, abducted on Sunday.
Qais al-Khazaali, an aide to the cleric, said that he had agreed to drop conditions for negotiations and decided to follow the guidance of the supreme Shia authority in Iraq, the Marjaiya.
The Marjaiya had, in turn, formed a team to negotiate with the coalition, led by Abdelkarim al-Anzi.
Another Sadr aide, Haidar Aziz, told AFP news agency that the cleric had agreed to turn his Mehdi Army into a "political and social organisation with no military activities".
The cleric was also, according to AFP, willing to stand trial for the murder of fellow religious leader Abdul Majid al-Khoei last year - but only under a future "legitimate and democratic" Iraqi government.
Mr Sadr, who had been demanding the withdrawal of coalition troops from residential areas and the release of detained supporters, has told the German news agency DPA that he will not go into exile in Iran, which is predominantly Shia Muslim.
An Iranian foreign ministry delegation has arrived in Baghdad in a bid to help resolve the crisis over Mr Sadr.
"It is our position that to the extent that Iraq's neighbours can help calm the
situation and help achieve a stable transition, those efforts would be welcome," an unnamed US official told AFP news agency in Washington.
In other developments:
- UN special envoy Lakhdar Brahimi says he is confident a new Iraqi caretaker government will be formed by 30 June
A rocket hits Baghdad's Sheraton Hotel causing no injury
- Moscow announces it is evacuating more than 800 citizens from Russia and other former Soviet countries by air, starting on Thursday
The fragile truce in Falluja is extended further but reports of skirmishes continue
A mortar or rocket hits a market in Mosul, killing four people and wounding six
US troops have been handing out leaflets in the Shia holy city of Karbala which accuse Mr Sadr of murdering his fellow cleric and using unrest as a shield against "justice".
Local people reacted angrily with resident Hussein al-Husseini telling AP news agency the coalition should beware "committing any crimes against Moqtadar Sadr".
Bulgarian coalition troops in Karbala reported coming under fire overnight but suffered no casualties.
At least 87 US soldiers have died in action this month while aid agencies counted at least 470 Iraqi dead in the Sunni city of Falluja alone last week.