The long-anticipated struggle for the soul and identity of Iraq has begun. It's the sequel to the battle for Baghdad that toppled Saddam Hussein 16 months ago -- and it's far riskier than the conquest of the Iraqi capital.

The fighting, triggered by Moqtada Sadr's Mahdi Army, began a week ago amid the tombstones in the sprawling Valley of Peace cemetery in Najaf and spread to the majestic gold-domed mosque where the founder of Shiite Islam, Imam Ali, is buried. The setting is so sacred -- in personal, national, Islamic and historic terms going back more than a millennium -- that it's comparable to waging war in a cemetery as venerated as Arlington National, around a shrine as revered as the Vatican, in a place as holy as Jerusalem's Old City.

Even if a cease-fire eventually is worked out -- truce talks broke down once again yesterday -- the battle is far from over. The stakes are now far greater than whether a rogue cleric and his renegade militia can diminish the fledgling Iraqi government and its U.S. patrons. Also hanging in the balance are the success of Iraq's transition, the credibility of its new government, prospects for stability and the withdrawal of U.S. troops, the role of Islam in Iraq's new political spectrum, and leadership of the Shiite majority -- to name but a few.

The outcome of the standoff with Sadr will help determine whether a strong central government can emerge -- and hold together -- against ethnic and religious factions. The failure of Prime Minister Ayad Allawi's government to face down Sadr's defiant forces would leave it vulnerable to other power plays -- potentially fracturing Iraq in ways that almost destroyed Lebanon during its 15-year civil war. That could mean the rise of a thug-ocracy rather than a nascent democracy, only this time in a geostrategic country with 10 percent of the world's oil reserves, second only to Saudi Arabia.

Like the original U.S. intervention in Iraq, there's no going back. The alternative is a festering -- and dangerous -- problem. Sadr, who refuses to surrender to face murder charges in the assassination of a moderate cleric, used the last cease-fire in April to rearm and recruit. The new government risks another messy Fallujah, where Sunni extremists last spring seized control after a military standoff led to a truce.

Although he may have only a ragtag force, Sadr is on the verge of sparking a mass political movement. The uprising in Najaf snowballed, spilling over into Baghdad's Sadr City slums and at least six southern Shiite towns. Protesters called for Allawi, also a Shiite, to resign; his party's office came under attack in the town of Diwaniya. In the port city of Basra, thousands chanted, "America and Allawi are infidels." Even more ominously, some 3,000 Sunnis in Fallujah taunted, "Fallujah is with Najaf."

The outcome of Sadr's challenge will further determine whether a national army can emerge to counter several militias, some larger and better-armed than Sadr's forces. Iraq's military has been struggling to rebuild over the last year, since the United States blundered by dismantling the 400,000-strong army without anything to replace it -- except U.S.-led coalition troops. So far, U.S. troops have done much of the fighting, which plays into Sadr's anti-American rhetoric.

"It will take success in Najaf to make other militias and warlords think about continuing. If the government succeeds -- and the price will be heavy -- then the warlords will have to think 'Are we next?' " said Judith Yaphe, a former CIA analyst now at National Defense University. "If it doesn't take a stand here, then Iraq becomes really ugly."

In the first test for the new force, Allawi declared that only Iraqi troops would go into Najaf's mosque; U.S. soldiers were restricted from entering the shrines. A clear-cut victory in Najaf -- symbolized by Iraqi troops willing to take on other Iraqis as much as the defeat of Sadr's defiant Mahdi Army -- would bolster the credibility of the fledgling security forces, which have had trouble holding together under attack.

Without a capable defense force, even a strong national government has limited prospects of ruling Iraq, much less transforming it. "If the central government doesn't meet this challenge then all the other hot spots -- especially in Fallujah and Basra -- will flare up. How this turns out will determine if there will even be a central government," said Yaphe. "If there is any sign of weakness in Baghdad, others may be inspired to take advantage and push their own agendas, like in Kirkuk."

That new army is ultimately the heart of a U.S. exit strategy, too. Without an alternative to provide security, the 160,000-strong, U.S.-led multinational force will find it difficult to withdraw and claim any kind of success.

Sadr's power play also comes as Iraq embarks on its first test of popular political will. In a gathering similar to Afghanistan's loya jirga, some 1,000 prominent Iraqis are convening today in Baghdad to select a new 100-member council, which will oversee the interim government selected by the United Nations and the United States. It will bring in new faces and provide an early indication of whether democracy can take root.

The three-day conference, already postponed once because of violence linked to Sunni extremists, needs the widest possible participation to be legitimate. Sadr already endangered the process by vowing to boycott the meeting. The confrontation between his army and the new government could also make it awkward for moderate Shiites to support decisions that come out of an event that is part of the U.S.-orchestrated transition -- right after U.S. troops besieged Najaf.

Breaking with his own government, interim Vice President Ibrahim Jafari, a Shiite and Iraq's most popular politician, according to public opinion polls, called Wednesday for U.S. troops to leave Najaf. Thousands of Iraqis -- reportedly including several police, who held up posters of Sadr -- demonstrated Friday in front of Baghdad's Green Zone, which shelters both the Iraqi government and the U.S. Embassy.

A deepening backlash could further complicate this second phase of the three-part political transition and damage the quest to build a model new democracy that would inspire a wider transformation in the Arab and lamic worlds.

The outcome in Najaf will also impact the goals and leadership of Iraq's Shiites, with potential spillover regionally. Although Shiites are the so-called second sect of Islam, they have been the most energetic force in changing the face of the Middle East over the past quarter century. Iraq, dominated by Sunni Muslims since it was carved out of the Ottoman Empire over eight decades ago, is likely to become the first Arab state to be ruled by Shiites once the transition is complete.

Unlike Persian Iran, the most popular Shiite leaders are clerics who respect the difference between religious and secular political affairs, even while favoring laws compatible with Islamic tenets. In symbolic Najaf, Sadr's goal was at least in part to hijack Shiite leadership and the nation's political process just as Iraqis are beginning to take control of it. His uprising challenges both religious moderates like Grand Ayatollah Ali Sistani and secularists like Allawi.

Sadr's vague but virulent platform seeks rigid Islamic governance. It capitalizes on opposition to U.S. troops. It responds to frustration over economic hardships that have not improved since Saddam's ouster. And it plays on the roots of Shiism, a sect born of defeat at the hands of mainstream Sunnis and which lauds martyrdom in the face of injustice; extremism within Shiism has historically thrived in an atmosphere of persecution.

"The end of the Baathist regime paved the way for a Shiite reawakening but has left behind an atomized leadership that has yet to coalesce behind any single party or platform," said Loulouwa Rachid in an analysis for the International Crisis Group. "The struggles within the Shiite community will determine whether an organized political force can emerge as its legitimate representative and, if so, which it will be."

This is a moment when Iraqis will begin making the first real choices in determining their identity in the post-Saddam era. Sadr's insurrection and a peaceful political conference symbolize the disparate scenarios for Iraq's future -- revolt or vote.

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Robin Wright covers U.S. foreign policy for The Post. She has reported on the Middle East for more than 30 years.

Iraq's renegade cleric: Moqtada Sadr wants to speak for Shiites, even by force.