7.45pm - UPDATE
BAGHDAD - Iraq's prime minister announced a limited amnesty for Iraqi insurgents Saturday and extended an olive branch to radical Shi'ite cleric Moqtada al-Sadr, whose loyalists have staged an uprising in several cities.
But a US military commander said "all bets are off" with Sadr's Mehdi Army after the shattering of a two-month-old cease-fire, adding US Marines had been engaged in hand-to-hand combat in recent days in the holy city of Najaf.
Prime Minister Iyad Allawi said there was no need for emergency laws to stabilise Iraq despite the fighting in Najaf and several other cities including Baghdad. He played down the role of the young firebrand cleric in the uprising.
"We do not feel that there is a need for emergency law, the situation is still under control despite what the media is trying to propagate," Allawi told a news conference.
A senior Iraqi official, appearing with Allawi, said the long-awaited amnesty would last for 30 days. He said it would not apply to insurgents who have murdered, raped or looted.
"This order has been established to allow citizens to rejoin the civil society and participate in the reconstruction of their country instead of wasting their lives pointlessly toward a lost cause," Allawi said.
He reiterated his commitment to Iraq's political transition despite widespread violence, saying a national conference would go ahead on Aug. 15 to choose a council to oversee the interim government, followed by elections in January.
In a reminder of Iraq's instability, insurgents fired nearly a dozen mortar bombs and rockets into central Baghdad late on Saturday. A US military spokesman said initial reports indicated there had been no casualties or damage.
CLOSE AND HEAVY FIGHTING
Clashes between marines and Sadr's militiamen continued into a third day Saturday in Najaf.
The marines have said they had killed 300 fighters. But a militia spokesman has said only 36 militiamen had died in several Iraqi cities from clashes that have fueled fears of a new rebellion of radical Shi'ites.
Speaking at a base near Najaf, Lieutenant Colonel John Mayer, battalion commander of the 11th Marine Expeditionary Unit, said his troops had engaged in close and heavy fighting.
"We could smell them and hear them," he said, adding the cease-fire had been torn up and that "all bets are off." He did not elaborate.
Iraqi police said Sadr had failed to meet a deadline to pull his militia from Najaf, 100 miles south of Baghdad.
Tension had been rising in Najaf since Iraqi security forces surrounded Sadr's house earlier this week.
But an aide to the cleric said Sadr -- the most vocal critic of the US presence in Iraq and whose fiery speeches appeal to downtrodden Shi'ite youth -- wanted a negotiated settlement to end the worst fighting in four months.
Ali al-Yassiri urged the interim government to take the cleric's offer seriously, saying scores of civilians have been killed in Najaf and in fighting in Baghdad.
"The door is open and will remain so as rivers of blood flow in Najaf," Yassiri told a news conference.
Allawi has gone out of his way to bring Sadr into the political fold. At his news conference, he insisted the Najaf troubles were fomented by criminals hiding behind Sadr's name.
"I have been having positive messages from Moqtada al-Sadr, that's why we don't think the people who are committing the crimes in Najaf and elsewhere are his people," Allawi said.
"I invite from this platform Moqtada al-Sadr to participate in the elections next year ... the political process is open for everybody, everybody who abides by the rule of law."
Allawi said Iraqi forces had captured 1,200 criminals involved in the unrest. He said some had been freed by Saddam Hussein months before he was ousted in April 2003.
The US military has said two US marines were killed in Najaf and one soldier in Baghdad in fighting Friday.
AL JAZEERA SHUT DOWN
Allawi's interim government also shut down the Baghdad office of Qatar-based Al Jazeera television for one month.
Allawi said a commission had been monitoring Al Jazeera to see whether it was inciting violence and hatred, and the decision was taken "to protect the people of Iraq."
The station denied the charges and said the decision to shut the office was "regrettable and we believe it's not justifiable." Last month it unveiled a code of ethics it said would ensure balanced and sensitive reporting.
Iraqi Interior Minister Falah al-Naqib said this week that Arabic satellite channels were encouraging kidnappings by showing images of hostages threatened with execution.
Scores of hostages from two dozen countries have been seized in the past four months. Most have been freed but at least 10 have been killed, and at least 20 are still being held in Iraq.
A Turkish company employing a truck driver taken hostage in Iraq said Saturday it was suspending all work in the country in response to his captors' demands, CNN Turk reported.
- REUTERS
Herald Feature: Iraq
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Iraq issues amnesty to insurgents as fighting rages
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