The agreement reached Thursday to end three weeks of violence was arranged by Iraq's most influential Shiite leader, Ayatollah Ali Sistani, the BBC reported.
The agreement was welcomed by the interim government in Iraq as a "great victory."
Members of Sadr's rebel Mehdi Army were to disarm and leave the holy Imam Ali shrine by Friday.
The pact came hours after scores died in attacks near Najaf, in the bloodiest day of the three-week standoff between U.S. troops and Sadr's rebel army.
Under the agreement, Sadr will hand responsibility for the shrine to Sistani and his men will disarm. Sadr's supporters would then be welcome to join the political process and he would be allowed to remain free.
Sistani, 73, arrived in Iraq Wednesday after a three-week stay in England where he underwent heart and eye surgery.