Paul Bremer, the US civilian administrator of Iraq, pledged that US forces would stop incendiary cleric Moqtada Sadr from trying to seize authority.

"We have a group under Moqtada al-Sadr that has basically placed itself outside the legal authorities, the coalition and Iraqi officials," Bremer said.

"He is attempting to establish his authority in the place of the legitimate authority. We will not tolerate this. We will reassert the law and order which the Iraqi people expect," Bremer told a national security meeting.

Fresh violence broke out in Baghdad, in the British-controlled southern port of Basra and in the central holy Shia city of Karbala as Sadr's Mehdi Army militia seized control of a government building and tried to capture others.

The US consulate meanwhile announced the closure of highways from Baghdad to the Jordanian capital Amman due to military activities in the area, where the restive towns of Ramadi and Fallujah are located and where residents said pre-dawn fighting caused several casualties.

US Marines later announced they had launched an offensive in Fallujah where four US contractors were killed last week and two of them savagely mutilated.

In Baghdad, fighting raged for a second day as US troops opened fire in the squalid slum of Sadr City at stone-hurling protestors.

A young child was wounded after soldiers fired back at people pelting them with rocks, an AFP photographer witnessed.

Hundreds of angry Shias had gathered in the slum for the funeral of an Iraqi killed late Sunday during fierce clashes between coalition forces and the Mehdi Army in which 22 Iraqis and seven US soldiers were killed.

Another 85 Iraqis and 24 US troops were wounded in the running street battles.

"There is only one God. America is the enemy of Allah," the crowd chanted Monday as a coffin was carried through the squalid streets which saw their worst fighting since the capital fell to the Americans one year ago.