NAJAF, Aug 23: The US forces in Iraq pounded Najaf's cemetery and historic centre near the Imam Ali Mosque on Monday, dimming hopes of a peaceful end to a nearly three-week stand off.

A hole one metre across was punched into the outer wall of the shrine compound after heavy gunfire on Sunday night, scattering debris across the marble floor. Shia leader Moqtada Sadr's supporters said it had been caused by a missile fired by a US helicopter, although the US military denied it had targeted the shrine.

In the evening the two sides exchanged heavy fire as planes hovered overhead. "Two rockets were fired from an American Apache. One hit the western wall of the shrine and the other a nearby hotel," said a spokesman for Moqtada Sadr.

The hotel is a known resting place for Mehdi Army commanders. A US military spokesman said: "The fire was not directed at the shrine. It did not hit the wall or any other holy site in the area."

Moqtada Sadr's whereabouts are unknown. Police in Najaf said they had information that he had fled to Sulaimaniya, in Kurdish northern Iraq. But Sadr's aides and local government officials in Sulaimaniya denied the report.

Dense black smoke spewed into the sky above the vast Valley of Peace burial ground after a deafening explosion in the morning. A second blast was heard in the early afternoon as a US plane flew overhead.

Hours later, another two raids targeted the Old City, as sporadic gun and mortar fire reverberated through the ravaged streets around the mosque. One person was killed and three wounded on Sunday night, said a doctor at the shrine's makeshift clinic. At least four more patients were brought in after daylight fighting.

DEAL IN LIMBO: Three days after Sadr's aides said they would hand over control of the Imam Ali Mosque to representatives of Iraq's most revered Shia leader, Grand Ayatollah Ali al Sistani, the deal was still in limbo.

"There is no fresh development ... There is contact between them and us but there are differences on forming the committee due to the security situation," said the Sadr spokesman, referring to proposals for a panel to carry out a full inventory of the shrine's contents before the handover.

The Mehdi Army has occupied the Imam Ali Mosque since a first uprising in April. Ayatollah Sistani, recovering in London after medical treatment, has been reluctant to take back the shrine without ensuring nothing is missing. The Mehdi Army is also unwilling to surrender control amid any suggestion of impropriety.

In an apparent relaxation of Sadr's demand that the Mehdi Army guard the mosque even once it is handed over, a top Sadr aide said Shia authorities would be responsible. "The religious establishment will be in charge of security and they should have their own security force," said Sheikh Ahmed al Sheibani, also a Mehdi militia commander.

Speaking to reporters inside the mosque, Sheikh Sheibani said the fighters would become "normal citizens" if US forces returned to their bases and the southern city became stable.

The uprising is a challenge to interim Prime Minister Iyad Allawi, who took over from US-led occupiers two months ago and faces the daunting prospect of getting Iraq ready for elections in January.

His government has tried to defuse the crisis with a mix of threats to storm the shrine and peace offering. Moqtada Sadr, the face of Shia resistance in Iraq, has at times appeared to accept the government's demands only to spurn them later.

Mr Allawi has insisted Sadr disarm his militia and take his grievances to the political arena. Serious damage to the Najaf mosque could enrage millions of Shias and fuel hostility to the US presence in Iraq.

Moqtada Sadr had insisted Ayatollah Sistani send a delegation to take an inventory of precious items in the mosque before it was handed over. Sheibani said that was no longer necessary.

Ayatollah Sistani, who usually lives in Najaf, is in London recovering from surgery. An aide said his offer to mediate the crisis by receiving the shrine's keys remained in place.

The uprising has also triggered violence in seven other southern and central cities, including Baghdad. Hospital officials said four Iraqis were killed in fighting in the predominantly Shia district of Sadr City in Baghdad on Monday.

There appeared to be fewer militia along the alleys leading to the shrine on Monday than on previous days. But Sheibani said fighters were being rotated.

Militants said they had enough food, water and ammunition to last for weeks, maybe months. "We are here to kill and we have enough stamina," said Hamed Khudayir, 54, referring to himself and his 10-year-old son. -AFP/Reuters