Hundreds of British troops backed by tanks have seized seven Iraqi police officers suspected of corruption and leading a death squad in Basra.
Some members of the Iraqi police are accused of corruption
The dawn operation formed the first stage of moves to disrupt and disband the southern city's Serious Crime Unit.
The move came as new US defence chief Robert Gates ended a visit aimed at finding a new strategy in Iraq.
Five US servicemen have been killed in the latest violence - bringing the US death toll nearer to 3,000.
President George W Bush faces continuing pressure in Congress to find a new strategy in Iraq, which he says he will announce in January.
He said for the first time this week the US was not winning the war, but was not losing it either.
His secretary of state Condoleezza Rice has again defended the conflict, saying the investment in US lives and dollars will be "worth it".
British forces in Basra say some commanders were using the unit as a cover for death squads and criminal activities which they controlled.
A military spokesman told the BBC that rather than solving serious crimes, the unit was carrying them out.
"The Iraqi police force has been infiltrated by rogue elements of militias, by criminal gangs, by people who want to jostle for political gain and criminal gain," Maj Charles Burbridge said.
"And the Serious Crimes Unit is the centre of all of that."
They suspect the unit may have been complicit in the killing of 17 police academy employees six weeks ago.
Troops seized evidence including computer disks and hard drives, which will be used in the investigation and to support any future prosecutions.
A British army spokesman said the operation was a significant step towards cleansing the Iraqi police service - and should be a warning to corrupt and criminal officers that they would be brought to justice.
The US defence secretary has returned to Washington to give Mr Bush his advice on Iraq policy following a three-day trip.
Rice said the Middle East would benefit from the sacrifice
The president is considering whether to send thousands more soldiers to control the violence, to boost the 140,000 American troops in Iraq.
Mr Gates declined to say whether he planned to recommend a short-term increase, but said he believed there was "a broad strategic agreement between the Iraqi military and Iraqi government and our military".
"The situation in Baghdad is obviously difficult," he added.
"Clearly success will only be achieved by a joint effort with Iraqis taking the lead."
On Thursday, Ms Rice admitted a lot had been sacrificed for Iraq, but said success would change the entire Middle East.
She was speaking soon after eight US marines were charged over the deaths of 24 Iraqi civilians in Haditha last year.
In the latest violence on Friday, a US soldier died when a patrol came under fire west of Baghdad, the military said. Three US marines and a sailor died from their wounds during fighting in Anbar province on Thursday.