Fierce clashes were raging in Sadr City, an AFP correspondent said, reporting that smoke was rising from some areas of the over-populated Baghdad slum while US fighter jets were flying overhead.

The health ministry said 40 Iraqis were killed and more than 270 wounded in overnight clashes between US forces and combatants loyal to rebel Shiite cleric Moqtada Sadr.

Sadr Lieutenant Sheikh Naim al-Qaabi said 15 of his movement's Mehdi Army fighters were killed and 62 wounded.

"Last night was the most intense shelling of Sadr City since the Americans arrived in Iraq," he said, adding heavy aircraft fire lasted from 11:00 pm (1900 GMT) to 4:00 am.

US army spokesman Lieutenant Colonel James Hutton reported several bomb and small arms attacks on US forces in Sadr City overnight and said one US soldier was killed in an ambush there on Tuesday.

US tanks rumbled around the neighbourhood and automatic fire echoed on Sadr City's main al-Shuhada Street. Four US military vehicles blocked off al-Hay square, home to Sadr's main office.

Tuesday's clashes marked the deadliest combat in the Baghdad neighbourhood since April.

Guerrillas attacked US troops in Baghdad's sprawling Shia Sadr City slum district with rocket-propelled grenades yesterday, killing one soldier and wounding two, the US army said.

The attack followed four separate roadside bomb blasts on Monday that killed four US soldiers.

The deaths will raise the official Pentagon US death toll to at least 993 since the start of the war in Iraq.

The US military said one soldier was killed in a blast in Baghdad on Monday afternoon, and another died of his wounds after an explosion on Monday evening.

In a third attack, near Baghdad, a soldier was killed late on Monday when his convoy was targeted. And in Qayarrah, near Mosul, one soldier was killed in a blast on the same day.

The US military had also reported the deaths of three other troops in separate attacks in the Baghdad area on Monday, bringing the total number of soldiers killed since the March 2003 invasion to 994.

The fresh violence came after the US military suffered its worst single human loss in months Monday, when a car bomb ripped through a joint convoy, killing seven marines and three Iraqi national guards near Fallujah.

The new eruption of violence brought an abrupt end to a period of relative calm which had followed Sadr's call last week for a ceasefire and pledge to join the political arena.

His surprise announcement came after the end of the weeks-long standoff between US troops and his Mehdi Army around the Imam Ali shrine in the holy Shiite of Najaf.

Yet negotiations to secure an agreement guaranteeing an end to violence in Sadr collapsed last week.

Sadr's office said the Iraqi government had refused their request that US troops should only enter the two-million-strong slum for reconstruction purposes and also rejected their demand for compensation.

The US military announced they had set up collection points across Sadr City for fighters to turn in their heavy weaponry but the call remained unheeded in the absence of a formal agreement.

The new flare-up left the Iraqi government in a deepening crisis, following the embarrassment over the false announcement that Saddam's fugitive deputy Izzat Ibrahim al-Duri had been arrested.

The capture would have been the highest-profile since Saddam Hussein himself was netted in December 2003 but officials sheepishly retracted their claim Monday after a day-long confusion.

Ibrahim is the most wanted member of the former regime still at large but an interior ministry spokesman said Monday that Iraqi forces had detained a man who resembled him.

As the capital was engulfed in a fresh wave of violence, Baghdad governor Ali al-Haidri narrowly escaped an assassination attempt, officials said.