U.S. forces abruptly ceased offensive operations here against the militia of Shiite Muslim cleric Moqtada Sadr on Friday to create an opportunity for peace talks between representatives of Iraq's interim government and people close to Sadr, U.S. and Iraqi officials said.

Sadr issued a statement late Friday calling for the withdrawal of U.S. forces from Najaf and for the Shiite holy city to be placed under the custodianship of two senior ayatollahs. One of Sadr's aides, Ali Smaisim, said that if the militia pulled out of Najaf, the cleric wanted its members to be granted amnesty and his supporters to be allowed to participate in politics.

Senior government officials in Baghdad met into the night Friday to discuss the proposal, but there was no immediate announcement of whether the terms were acceptable to Iraq's interim leadership. Government officials have demanded that Sadr disband his militia, the Mahdi Army, but this was not part of Sadr's offer, as it was outlined by Smaisim.

As the crisis has escalated, both sides have been pushed toward a settlement, despite concerns among U.S. military officials that any negotiated end to the hostilities that allowed Sadr to retain his militia could pose a serious threat to the interim government.

At 11 p.m. Friday, a spokesman for Sadr, Ahmed Shaibani, said a cease-fire agreement had been reached with government negotiators calling for a halt to fighting but not a withdrawal of forces. Shaibani, who called the talks "serious and positive, but difficult," said the deal applied only to Najaf and not to other Iraqi cities racked by violence between Sadr's militiamen and security forces.

Shortly after Shaibani's announcement, Sadr walked into the gold-domed shrine of Imam Ali in Najaf's old quarter, which was seized by the Mahdi Army last week, and exhorted his supporters to "keep fighting."

"I will not leave Najaf, and I ask all the holy warriors not to leave," he said. "I ask all holy warriors to stay firm and fight. We say this truce might be a trick. Don't be deceived."

In a brief but defiant address, Sadr called on the interim prime minister, Ayad Allawi, to resign. Allawi's government, he said, was "rejected by all Iraqis."

"We got rid of Saddam [Hussein], but we got a worse government," he said.

Although Sadr's aides had told reporters earlier on Friday that the cleric had been wounded in the chest and leg by shrapnel, he did not appear to be hurt during his appearance at the shrine.

Despite Sadr's belligerent language, his militia remained largely quiet in Najaf on Friday. There were none of the mortar volleys fired at U.S. and Iraqi forces as they had been on Thursday, and almost no small-arms or rocket-propelled grenade fire.

Sadr appears to be keen to negotiate because his militia suffered significant casualties in a multi-pronged assault by U.S. and Iraqi forces that began on Thursday. Iraq's interim government seems equally eager to end the fighting because the instability here has spread across much of central and southern Iraq in recent days, sparking large demonstrations on Friday, apparent defections from police and national guard units, and strident criticism from neighboring nations.

Last weekend, Allawi vowed that there would be "no negotiations or truce" with Sadr, and on Thursday, Interior Minister Falah Naqib said the government had "no other solution" than military force for dealing with the Mahdi Army. On Friday, however, Naqib extended an olive branch to the cleric, promising that Sadr would "not be touched if he leaves the shrine peacefully," according to the Reuters news agency.

U.S. military commanders were skeptical that the truce would lead to a lasting deal. "My personal and my professional belief is that the militia has no intentions of adhering to any altruistic beliefs in a cease-fire," said Maj. David Holahan, the executive officer of the 1st Battalion of the 11th Marine Expeditionary Unit. "They will use every opportunity they have to get an advantage on us."

U.S. commanders are concerned that any agreement that allows Sadr to retain his militia could result in another confrontation. The fighting over the past week has been remarkably similar to a fight between U.S. forces and the Mahdi Army in April and May that ended with a truce allowing Sadr to keep his militia.

In Washington, Secretary of State Colin L. Powell said that "as long as those individuals don't understand the spirit of peace and reconciliation, and they are not willing to work for a democratic, free Iraq, they have to be dealt with."

Friday's truce abruptly halted a flurry of U.S. military activity associated with the offensive launched barely 24 hours earlier. During that time, the Army established an armored cordon around the narrow winding alleys and close-packed houses of Najaf's old city, while Marines fought their way into a disused school that had turned into a militia muster point.

Early Friday, just after midnight, Iraqi commandos raided a mosque just north of the city of Kufa, the Sadr stronghold that borders Najaf to the east. Marines accompanied the Scouts commando unit of the Iraqi National Guard's 36th Battalion, who rode to the fight in open-sided Land Rovers escorted by U.S. Special Forces. Near Kufa, the Iraqi force killed six Mahdi Army gunmen and captured a dozen more, according to the military.

Each side blames the other for the week-long violence. U.S. military officials say they were attacked when they went to the rescue of an Iraqi police station that had come under fire in Najaf; Sadr's supporters say the Americans violated the June truce by entering the city.

Sadr's supporters staged peaceful demonstrations in several cities across Iraq on Friday, denouncing the Iraqi government and the continued presence of U.S. troops. The largest gathering was in Baghdad, where thousands of Shiites converged on the entrance to the walled-off International Zone, where American and top Iraqi government officials work.

There were similar protests in Basra, Kufa and Diwaniyah.

The Iraqi demonstrations were echoed in neighboring Iran, where thousands marched in Tehran, the capital, to protest the U.S. actions in Iraq, chanting "Death to America" and burning American flags.

The confrontation in Najaf also exposed weaknesses in the Iraqi security services. There were several reports of Iraqi police pledging loyalty to Sadr and scattered instances of police mounting Sadr's portrait on their patrol cars.

"We are not ready to shoot even one bullet against any Iraqi, whether Mahdi Army or not," the Sadr City police chief, Lt. Col. Kadim Muhammed, said on al-Jazeera, the Arabic satellite television network. An Iraqi National Guard officer, who spoke on another network, al-Arabiya, but was not identified, said two battalions "announced full solidarity with Sadr and will protest with Sadr until there is a cease-fire in Najaf." He said the National Guard had laid down its arms and would not work with the Americans.

But the claims were rejected by other security officials. "These are lies," Lt. Col. Heider Abdul Rasul, a commander of the National Guard, said in an interview. "This was theater created by al-Jazeera and the Mahdi Army."

The new U.N. envoy to Iraq, Ashraf Jehangir Qazi, a former Pakistani ambassador to Washington, arrived in Iraq on Friday to restore operations that were halted after a truck bombing on Aug. 19, 2003, killed 22 people, including the previous envoy, Sergio Vieira de Mello.

In a statement read by his spokesman, Qazi called for "a peaceful settlement of difference" in Najaf. He is to attend a national conference of 1,000 Iraqis, scheduled to begin on Sunday, that is supposed to select an interim national council.

At the United Nations, Secretary General Kofi Annan offered to mediate an end to the Najaf standoff, saying that stability in Iraq should be achieved through "negotiation rather than violence," according to a statement from Annan's office.

According to U.N. officials, Sadr's camp appealed to the United Nations to intervene diplomatically to end the fighting. The United Nations continues to maintain contact with Sadr's supporters, and Annan called on Sadr and other armed groups to dismantle their militias.

[On Saturday, the U.S. military announced that two U.S. troops were killed in separate incidents Friday in Anbar province in western Iraq, according to the Reuters news agency.]

On Friday, gunmen in Basra abducted a British freelance journalist from his hotel room, but later released him after the intervention of Sadr's aides.

James Brandon, who works for the Sunday Telegraph and other publications, was shown on a videotape in which a hooded captor threatened his execution if foreign troops did not leave Najaf. Brandon was handed over at Sadr's office in Basra shortly afterward. He had a black eye but said he was in "good health."

Also Friday, U.S. airplanes dropped bombs on several targets in the Sunni Muslim city of Fallujah. Reuters reported that four Iraqis, including two children, were killed. The United States had no comment. The military has repeatedly bombed Fallujah, targeting a wanted Jordanian militant, Abu Musab Zarqawi.

Correspondent Doug Struck and special correspondents Khalid Saffar and Luma Mousawi in Baghdad, special correspondent Saad Sarhan in Najaf and staff writers Robin Wright in Washington and Colum Lynch at the United Nations contributed to this report.

The radical Iraqi cleric Moqtada Sadr, speaking at the Imam Ali shrine in Najaf, proposed a mutual withdrawal of forces and amnesty for his fighters.Shiite Muslim youths march in Najaf to protest the latest U.S. offensive. Similar demonstrations took place in cities throughout Iraq on Friday.