U.S. troops and Shi’ite rebels fought fierce battles in the holy Iraqi city of Najaf yesterday, with multiple explosions and gunfire echoing around a sacred shrine held by followers of a radical cleric.

At least 10 explosions, some sounding like artillery shells, rocked the area near the Imam Ali mosque, where the Mehdi Army militia of Moqtada al-Sadr have defied the interim government of Prime Minister Iyad Allawi for nearly three weeks.

Shrapnel landed in the courtyard of the gold-domed mosque, whose outer walls have already been slightly damaged in fighting since the eruption of the rebellion which has killed hundreds and driven oil prices to record highs.

In news that may calm jittery oil markets, Iraq’s crude exports were back to normal on Monday for the first time in two weeks. Exports had been sharply reduced due to sabotage and threats from militants.

Oil rose to nearly $50 a barrel last week, although prices later eased. NYMEX crude futures for October were trading at $47.04 a barrel on Monday.

The fighting around Iraq’s holiest Shi’ite Muslim shrine eased by mid-morning, while U.S. tanks pulled back from positions held on Sunday when they were as close as 800 metres (yards) to the compound.

Overnight, a U.S. AC-130 gunship blasted rebel positions after a weekend of fruitless talks between Sadr’s aides and religious authorities to hand over the keys of the shrine to Ayatollah Ali al-Sistani, Iraq’s most respected Shi’ite cleric.

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 Shi’ite 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 after the bout of fighting eased, Sheibani also said the cleric’s fighters would become “normal citizens” if U.S. forces returned to their bases and the southern city became stable.

The uprising is a brazen challenge to 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 offerings.

The elusive Sadr, whose whereabouts are unknown, has at times appeared to accept government demands only to then reject them. Allawi has insisted Sadr disarm the Mehdi militia and take his grievances to the political arena.

The shrine has been the focus of the rebellion that has also triggered violence in seven other southern and central cities, including Baghdad.

Serious damage to the mosque precincts could enrage millions of Shi’ites and fuel hostility to the US presence in Iraq.

The U.S. military said four marines and one soldier were killed over the weekend in separate incidents.