BAGHDAD, Aug. 19 -- Interim Prime Minister Ayad Allawi issued a "final call" on Thursday for Shiite Muslim cleric Moqtada Sadr to end his rebellion by agreeing to a new set of conditions issued by the government. Sadr responded by rejecting one of the government's two key demands, increasing the prospect of an intensified military attack against his militia.
The dramatic back-and-forth occurred as U.S. forces escalated their military operations in Najaf, dropping bombs and firing artillery to prepare for an assault on a sacred Shiite shrine that has been taken over by Sadr's militiamen.

A building explodes during a U.S. aerial assault in Najaf, where troops have escalated operations near the shrine of Imam Ali.
(Photos Jim Macmillan -- AP)
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_____Live From Najaf_____
Transcript: The Post's Karl Vick discussed peace negotiations between Moqtada Sadr and the Iraqi interim government.
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_____Who Is Sadr?_____
Q & A: More on the firebrand Shiite cleric whose Mahdi Army has been fighting U.S. and Iraqi troops.
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Allawi said that "the door is still open" for Sadr's compliance, but warned that very little time remained for the cleric to abide by the government's demands that he dissolve his militia and vacate the shrine.
The interim prime minister's statements were the latest chapter in a tense, arm's-length exchange aimed at avoiding a violent showdown at the gold-domed Imam Ali shrine, one of the holiest sites for Shiite Muslims.
Sadr's office issued an unsigned letter on Thursday night that aides said was written by the cleric and bore his seal. The letter called on his followers "to hand over the keys of the shrine to [Shiite religious leaders] as fast as possible so we will prevent infidels from entering this holy place."
But the letter rejected the other central demand of the Iraqi government, the dissolution of Sadr's Mahdi Army militia, saying it is a volunteer organization that belongs to Imam Mahdi, the Shiite messiah.
"Let everyone know that this army is the Imam Mahdi's base and I have no right to ever disband it," the letter said.
Sadr's refusal to disband his militia could trigger an all-out assault by U.S. and Iraqi forces against the Mahdi Army. Military officials have said such an operation would include efforts to flush militiamen out the mosque.
"We will categorically not allow armed militias," Allawi said at a news conference in Baghdad. "This is the final call to them to disarm."
Although Sadr's office sent a letter to a conference of Iraqi leaders Wednesday indicating that he would disband his militia and leave the shrine, Sadr and his aides took a far more bellicose tack on Thursday. One aide said Sadr, a mercurial 30-year-old, had instructed his deputies not to pursue talks with the government and to prepare instead for "martyrdom or victory."
The actions of Sadr's militiamen Thursday also prompted new concern among government officials about the cleric's sincerity in reaching a peaceful resolution. In Najaf, members of his Mahdi Army bombarded a police station with mortar rounds, killing seven policemen and injuring 31 others.
In Baghdad's Sadr City district, a Shiite slum, Mahdi Army militiamen engaged in several firefights with U.S. forces. In the port city of Basra, news services reported that militants loyal to Sadr broke into the headquarters of Iraq's state-run southern oil company and set warehouses and offices on fire after driving off security guards in a gun battle.
The Republican Palace in Baghdad's Green Zone, which now houses most of the U.S. Embassy's staff, was struck by a mortar round Thursday afternoon, wounding two Americans working for the embassy, an embassy spokesman said. The shell hit the roof of the building, which includes the office of U.S. Ambassador John D. Negroponte. It was not known who fired the mortars. Although mortars and rockets are routinely launched into the Green Zone, it is rare for them to be accurate enough to hit such a prominent target.
With a raid on the shrine and the surrounding neighborhood appearing increasingly likely, U.S. forces in Najaf stepped up efforts on Thursday to combat militiamen in other parts of the city. There were intense exchanges of fire as U.S. troops pushed into areas controlled by the militia. Bradley Fighting Vehicles advanced down streets firing bursts from M242 Bushmaster chain guns at 200 rounds per minute into buildings sheltering militiamen. After dark, an AC-130 Spectre gunship circled over the city, unleashing its 105mm howitzer with a repetitive gong that reverberated across the city.