US military commanders have postponed a major offensive against Iraqi fighters in the besieged city of Falluja.
Falluja has been at the heart of the anti-US insurgency
Instead, US marines will begin joint patrols with Iraqi security forces under a new plan agreed between US forces and Iraqi negotiators.
Meanwhile, a huge explosion in Baghdad has reportedly injured several US soldiers and Iraqis.
It comes as the UK holds talks with coalition allies about the possibility of sending more troops to Iraq.
And US soldiers continue to surround the city of Najaf where, US officials say, supporters of the radical Iraqi Shia cleric, Moqtada Sadr, are stockpiling weapons.
BBC correspondents say the new US strategy for Falluja was apparently reached after a video conference at the weekend between President George W Bush and his senior commander in the Middle East, General John Abizaid.
The general had visited the western city with the chief American administrator in Iraq, Paul Bremer, to meet local leaders on Saturday.
The ceasefire has now been extended and the joint patrols could begin as soon as Tuesday.
Local leaders will announce that anyone carrying weapons on the street will be regarded as hostile.
Despite this, there were reports of clashes between US marines and Iraqi fighters on the outskirts of Falluja on Monday. One report says 10 US marines were injured in the fighting.
A third of the city's 300,000 residents are thought to have fled the heavy fighting in Falluja in recent weeks between US marines and Iraqi insurgents, which has reportedly killed hundreds of civilians. The new agreement means more of them will now be allowed to return.
The BBC's Justin Webb in Washington says President Bush appears to have decided that the risks of a full-scale attack are too great.
However, there are reported to be concerns inside the Pentagon that the proposed patrols will put US troops and their Iraqi colleagues at risk without achieving much.
And a US military spokesman said that military action was still an option.
US marines launched their operations against the city on 5 April following the murder of four American security contractors there at the end of March.
The explosion that hit a US military patrol in Baghdad on Monday morning was heard in many areas of the capital and a large cloud of black smoke billowed over the area.
It destroyed a building containing chemicals that had been surrounded by the Americans.
Eyewitnesses said there had been several American and Iraqi casualties.
"A huge explosion occurred and four Humvees were set ablaze
after US soldiers entered a chemical lab," said witness Salah
A US military spokesman confirmed that four Humvee armoured vehicles had been destroyed in the explosion.
The cause of the explosion has yet to be confirmed.
Oil flow resumes
The possibility of an increase in the number of British troops in Iraq from its current level of about 7,500 follows an urgent review of troop numbers following Spain's decision to withdraw its 1,300-strong force.
A UK Ministry of Defence spokeswoman said Britain was discussing "a range of options" with coalition partners.
BBC defence correspondent Paul Adams says this could mean deploying extra troops outside the British-controlled south of the country.
Iraqi Oil Minister Ibrahim Bahr al-Ulum says oil exports are back to normal levels through the main terminal at Basra after Saturday's suicide attack on the port.
The minister said security had been stepped up at the terminal, which handles more than 80% of Iraq's oil exports.
Damage to the terminal is believed to have cost Iraq nearly a million barrels of lost exports.
Two US Navy officers were killed on Saturday when one of the boats used in the attack blew up as they tried to board it. A third American has since died of his injuries.
It was the first maritime attack on Iraq's oil installations since the March 2003 US-led invasion of the country.