Witnesses in the Shiite holy city of Najaf in central Iraq said U.S. helicopter gunships took part in the fighting, which intensified through the night with no political solution in sight.
They said the helicopters fired missiles at suspected positions of Sadr's al-Mehdi Army in the vicinity of the Imam Ali Mosque and mausoleum, the holiest shrine for the Shiites.
Sheik Ahmed Shibani, a spokesman for Sadr's group, said a U.S. tank shell hit the western fence of the mosque causing a big crater and killing or wounding a number of civilians who were hiding inside the compound.
He said the Americans were using internally-banned cluster and fragmentation bombs in the military operation aimed at rooting out Sadr's armed followers from the mosque and its vicinity, where they have been holed up for the past few weeks.
Shibani denied Iraqi government claims that Iraqi police had seized control of the Imam Ali Mosque and rounded up 450 followers of Sadr.
Witnesses said U.S. tanks were trying to advance toward the mosque but were met with harsh resistance by the Shiite gunmen who stopped them some 400 meters away.
Another Sadr spokesman, Sheik Ali Samisem, said overnight fighting killed or wounded seven fighters from the al-Mehdi Army.