British forces surrounding the southern city of Basra have shelled Iraqi defences after coming under fire near a checkpoint.
British tanks returned fire
UK troops used a barrage of artillery to destroy a building where Iraqi resistance was thought to be based.
The soldiers came under fire near a checkpoint where a stream of civilians had just passed through.
The latest exchange comes as it was confirmed a 27th UK serviceman had died in conflict - the soldier was killed in an accident involving a light armoured vehicle, the Ministry of Defence said.
In the attack around Basra, three British tanks are said to have returned fire at an apparent administrative building where Iraqi paramilitary fighters were thought to have been hiding.
The BBC's Kylie Morris said just before the incident luggage-laden civilians had driven through the checkpoint, beeping horns appearing to be "trying to get away from this area as soon as possible".
Meanwhile US ground forces have begun a major attack against Iraqi Republican Guard divisions, in what is being seen as the start of a key offensive against Baghdad.
The commander of British forces in Iraq, said the war was entering a decisive phase.
But Air Marshal Brian Burridge told BBC Radio 4's Today programme this did not mean a swift end to the conflict was in sight.
"Decisive phases often take time, so I wouldn't want to give the impression that within a day or two this is going to be finished.
"We need to proceed with great delicacy in Baghdad as we did in Basra because we don't want to cause any more damage to the place than is necessary, and we certainly don't want to add to civilian casualties."
Military historian Anthony Beevor said Saddam Hussein "needs massive civilian casualties to win the battle of international opinion".
'Firmly in control'
"We will see more cases of military positions being put on top of air-raid shelters so there will be outrage around the world at the civilian casualties caused as a result," he told the same programme.
At a press conference from the US Central Command on Wednesday, Brigadier General Vince Brooks told how British forces patrolling southern Iraq had captured five cruise missiles near al Zubayr airport.
The missiles were capable of firing into Kuwait or against ships in the north Arabian Gulf, he said.
UK troops remained "firmly in control of the northern approach to Basra", he added.
He told of a particular capture of a motorcycle courier and crew, who held maps showing enemy artillery positions.
"The UK forces went to find the artillery positions - found them, destroyed all their artillery and also found three other missiles and destroyed those as
well," he said.
In other developments:
Foreign Secretary Jack Straw said the future governing of Iraq would be controlled by Iraqi nationals.
He was responding to suggestions the US would appoint 23 American ministers to run the country in the conflict's aftermath
US special forces rescue American private Jessica Lynch, taken prisoner by the Iraqis on 23 March when her convoy was ambushed in the southern town of Nasiriya.
Some 12 British casualties returned home to the UK via Luton airport on Wednesday.
The MoD declined to give details about which hospitals they were taken to or about their conditions.
The human rights organisation, Amnesty International, has urged US-led forces in Iraq to take greater care to prevent civilian casualties, and called on Iraq to stop soldiers posing as civilians.