Iraqi prime minister Nouri Maliki has ordered the release of a senior figure in the organisation headed by radical Shia cleric Moqtada Sadr.
Mr Saedi was detained on Tuesday by US forces
The man, Sheikh Mazin Saedi, had been detained by American troops in the Iraqi capital Baghdad on Tuesday.
Some 5,000 Shia protesters marched in Baghdad on Wednesday calling for his release, the Associated Press reported.
The Mehdi army, a militia controlled by Mr Sadr, has been widely accused of involvement in sectarian violence.
The United States military declined to identify individuals it had recently detained.
But it said it had captured "the alleged leader of a murder and kidnapping cell" in east Baghdad.
It said the cell leader was suspected of having directed kidnappings, killings and torture of Sunnis and Shias, and of having connections to attacks on Iraqi and coalition forces.
'Kidnappings and torture'
The announcement of Mr Saedi's release came shortly after Mr Maliki held talks in the city of Najaf with Moqtada Sadr and the most senior Shia cleric in Iraq, Grand Ayatollah Ali al-Sistani.
Mr Sadr's office said the detained man was a local leader of his political organisation.
The Iraqi prime minister has repeatedly pledged to take action against militias - but he has criticised American raids targeting suspected militia members, saying they could damage national reconciliation efforts.
Moqtada Sadr has in recent years become part of the political process, despite initially opposing it and leading two localised uprisings against US-led forces.
His movement is part of the largest bloc in parliament, the United Iraqi Alliance, alongside the two largest Shia parties. It has strong support among poor Shias, particularly in eastern Baghdad.
Despite repeated accusations that the Mehdi Army, the militia linked to his party, has been involved in death squads carrying out attacks on Sunnis, Mr Sadr has several times called for calm amid rising sectarian tensions.
Analysts say it is likely that he does not have full control of the loose network of militias and armed groups linked to the Mehdi militia.
The development comes ahead of a meeting of Iraqi Sunni and Shia leaders in the holy city of Mecca, Saudi Arabia, which aims to quell the spiralling sectarian violence in Iraq.
Held under the auspices of the Organisation of the Islamic Conference, the gathering of clerics from the two branches of Islam will begin on Friday.
It is expected to back a statement condemning Muslim attacks on other Muslims, supporting the unity of Iraq and calling for the protection of Islamic holy sites.
Separately, the Iranian foreign ministry has responded to comments by the Iraqi president, Jalal Talabani, that Iran and Syria could do more to help stabilise the situation in Iraq.
An Iranian foreign ministry statement said Mr Talabani was not suggesting that Iran was doing anything to destabilise its neighbour.
It said the president meant that Iran could use its spiritual influence over some groups in Iraq to curb violence and create security.
A foreign ministry spokesman said Iran was willing to do its best to help Baghdad because Iraq's security was part of Iran's security.
Iran has offered in the past to talk to the United States about Iraq.
It did not say directly that it was willing to do so, and analysts point out that tensions over Iran's nuclear programme make it difficult to know how Tehran would react to a US offer of talks on Iraq.