FALLUJAH, Oct 15: US and Iraqi troops encircled the city of Fallujah on Friday in the hunt for Abu Mussab al Zarqawi as locals protested Iraq's most wanted man was not there and a car bomb explosion killed 10 people in Baghdad.

As the noose tightened around Zarqawi's network, believed to be holed up in the guerilla bastion, the United States formally designated it a "foreign terrorist organization" and slapped sanctions on the Jordanian-born militant.

The move came one day after twin bombings claimed by Zarqawi ripped through Baghdad's once impenetrable Green Zone, home to the US embassy and Iraqi government, killing at least five people.

Officials have warned of a spike in attacks during Ramazan, which started on Friday. More than 1,000 US and Iraqi ground troops formed a ring around Fallujah after blistering air strikes overnight that left at least eight people dead.

They "have taken up vehicle checkpoints ... with the purpose of channelling anti-Iraqi forces through these main points of passage, identifying and detaining them," marine spokesman Lieutenant Lyle Gilbert told AFP. But the advance prompted Sunni Muslim clerics to threaten a holy war on the Americans and charge that marines had arrested a key Fallujah leader involved in negotiations to avert an armed confrontation.

The marines refuted the allegations. Sheikh Khaled Hamoud was arrested by US troops at a mosque near the city, according to a colleague, Sheikh Abdul Hamid Jadu. He said that Hamoud had been part of a delegation working on a peace deal with the interim government, which crumbled after Prime Minister Iyad Allawi ordered them to hand over Zarqawi.

Jadu maintained that Zarqawi was not in Fallujah and only "a very small number of foreign fighters" remained in the Sunni Muslim city, west of Baghdad. The military push followed a threat by Allawi to invade the city unless its people handed over Zarqawi, who has a 25-million-dollar price on his head.

Turning up the heat, Washington named the militant's Tawhid wal Jihad (Unity and Holy War) group a terrorist organization and slapped it with economic sanctions, along with three of its aliases.

Zarqawi's network, which is allegedly linked to Osama bin Laden's Al-Qaeda network, is accused of some of the deadliest car bombings and a string of kidnappings and beheadings in Iraq.

The car bomb explosion in the Iraqi capital that killed 10 people happened near a police patrol. The US military said the car, packed with about 135kgs of explosives, blew up as the police patrol passed.

All the dead were civilians, including a family of four travelling past in a car. The attack sent chills down the spine of locals worried for their safety during Ramazan after Zarqawi's group on Thursday claimed the deadliest attack ever in the once impenetrable Green Zone.

A pair of bombers struck in a bustling restaurant and bazaar in the citadel-like area, killing 10 people, including four US private security contractors, while another US citizen was presumed dead.

Adding to the foreign civilian death toll, British security firm ArmorGroup said one of its employees was shot dead on Monday near to the northen Iraqi oil centre of Kirkuk.

Foreign companies are a prize target in a surge of violence that has shaken Iraq since last year's US-led invasion. Meanwhile, the government said a five-day initiative for militants loyal to Shia leader Moqtada Sadr in the Baghdad slum of Sadr city to hand over their weapons for cash had been extended by 48-hours.

"It's been extended two days with no conditions," Iraqi National Security Advisor Kassem Daoud said. Daoud added that similar programmes would soon begin across the country. -AFP