Fighters loyal to radical Shia cleric Moqtada Sadr have been handing over their heavy weapons in the Sadr City area of the Iraqi capital, Baghdad.
Weapons can now be exchanged for cash in Sadr City
The militiamen are receiving cash payments in return for rocket-propelled grenades, mortars and other weapons.
Also under the deal, political prisoners are to be released and reconstruction money will be pumped into the area.
US forces have agreed to end their air and artillery strikes on Sadr City.
The BBC's Karen Allen in Baghdad says the arms that were turned in on Monday did not represent the flood of weapons that some people had hoped for.
However, interior ministry officials described it as a good start and said some people did not ask for any money at all.
In other developments on Monday:
- An Iraqi militant group, Ansar al-Sunna, has posted video footage on its website showing a Turkish contractor and his Iraqi translator being beheaded for working for the US in Iraq
- American marines have clashed with insurgents near the western town of Hit, leading to US air strikes which damaged a local mosque and set it on fire, the US military says
- Two American soldiers have been killed and five others wounded in a rocket attack in southern Baghdad
- Two Iraqis and a US soldier were killed and at least 17 others wounded in the northern city of Mosul when a suicide car bomber attacked a US military convoy.
Sadr City is a poor, run-down area with a population of two million.
The Iraqi government has reportedly committed more than $500m to rebuild the area, which has seen intense fighting since April.
Two police stations and a town council building are the designated sites for armed supporters of Mr Sadr - known as the Mehdi Army - to surrender their heavy and medium-sized weapons over a five-day period.
An Iraqi National Guard captain told Reuters news agency that militiamen were being paid $50 for each weapon they handed over.
Malik Jomaa, a 20-year-old fighter dressed in a tracksuit, carried a white bag
containing two grenade launchers to one of the collection points, the Associated Press news agency reported.
"God willing, there will be no more fighting and Sadr City will live in peace," he said.
Our correspondent in Baghdad reports that a lot of hopes are being pinned on this deal.
She says that, at best, it could pave the way for similar negotiated settlements in other trouble spots in Iraq at a time when the interim Iraqi government is trying to improve security ahead of elections planned for January.
Negotiations similar to those in Sadr City are under way in the restive Sunni city of Falluja, which has been a no-go area for US forces since a siege was lifted last April.
Defence Minister Hazem Shaalan is due to meet a delegation from the city amid reports of progress in talks.
The Sadr City deal is not the first time that the Iraqi authorities have tried to
make peace with the Mehdi Army. A peace deal brokered after
heavy fighting in the holy city of Najaf in August allowed
the militia's fighters to walk away with their weapons.
The deal was announced on Sunday, as two suicide bombings in other parts of Baghdad killed at least 11 people.
'Test of wills'
US Defence Secretary Donald Rumsfeld has warned that violence will get worse in the run-up to elections in January.
Mr Rumsfeld made the remark during an unannounced visit to US soldiers in the restive province of al-Anbar, west of the Iraqi capital, on Sunday.
He said the US and its allies were engaged in a "test of wills" with Iraqi insurgents.
"They know they cannot defeat us militarily, but they are hoping they can win the test of wills," the defence secretary said.
US troop levels were unlikely to fall before Iraq's elections, he said, adding he hoped the newly trained Iraqi security forces would eventually ease the burden on American forces.