NAJAF, Aug 12: US marines backed by tanks and aircraft seized the heart of Shia holy city of Najaf on Thursday in a major assault on guerillas of Mehdi Army that drove world oil prices to record highs.

Warplanes and helicopters pounded Shia guerillas' positions in a cemetery next to the Imam Ali Mosque while US forces stormed the home of Moqtada Al Sadr. The 24-hour nation wide fighting has left 165 Iraqis dead and 600 wounded. However, a late night BBC TV report put the number of dead at 300.

Mr Sadr was believed to be holed up in the mosque along with hundreds of his Mehdi Army guerillas, witnesses said. He has pressed loyalists to fight to the end, regardless of whether he is killed or captured.

DEPUTY GOVERNOR RESIGNS: Shortly after the attack began, Najaf deputy governor Jawdat Kadam Najem al-Kuraishi resigned in protest "against all the US terrorist operations that they are doing against this holy city."

The government said 24 hours of fighting across Iraq, mostly in the Shia south and Sadr's Baghdad stronghold, claimed 165 lives and wounded 600. Interim Prime Minister Iyad Allawi urged the militiamen to lay down their arms and leave the mosque, a site sacred to millions of Shias around the world.

The US-led assault in such a holy city for Iraq's majority Shia community could spark a firestorm for Mr Allawi, who needs to crush the uprising that has disrupted vital oil exports and threatened to undermine his six-week-old government.

"This government calls upon all armed groups to drop their weapons and rejoin society. We call upon all armed men to evacuate the holy shrine and not to violate its holiness," Mr Allawi said in a statement read by a senior official.

Oil prices hit new highs on the offensive, which the militia has warned could trigger more attacks on oil infrastructure. US light crude rose 65 cents to $45.45 a barrel, the highest price in 21 years of trade on the New York Mercantile Exchange.

Late in the afternoon, US warplanes bombed targets near Mr Sadr's house as marines battled militiamen in the area. Black smoke billowed as combatants exchanged heavy fire. US forces stormed Mr Sadr's house just before nightfall.

Marines also blocked entry to the Imam Ali Mosque. In the southeastern city of Kut, at least 72 people were killed in US air raids and fighting between Iraqi police and the Mehdi Army on Thursday, the Health Ministry said.

It said 25 people were killed in clashes in Baghdad and 21 in other cities in the past 24 hours. There were no immediate casualty figures from the Najaf offensive. Protests broke out in Baghdad and the southern city of Basra after the start of the offensive.

The Mehdi Army vowed to continue fighting, saying Mr Sadr was leading the defence at the Imam Ali shrine and vast cemetery, one of the Middle East's largest. "The morale of the fighters is very high," said Ahmed al-Shibani, a senior Sadr spokesman in Najaf.

Analysts warned of a backlash even if the Imam Ali mosque were undamaged and the militiamen beaten in Najaf. They said resentment could pose long-term consequences for Mr Allawi.

"This has the potential to be a highly destructive bout of fighting," said Gareth Stansfield, a Middle East expert at London's Royal Institute of International Affairs. "It's not just the physical damage, it's the symbolism of the Americans being in Najaf as well that is damaging."

Militiamen responded to the American assault in Najaf with rocket-propelled grenades and mortar bombs. Many civilians fled the centre of the city, some escaping on carts pulled by donkeys.

Some 2,000 US servicemen and 1,800 Iraq security men are deployed around Najaf, a city of 600,000 about 160 kilometres south of Baghdad. The US military claimed Iraqi forces were actively involved in the offensive, although witnesses said American troops were doing most of the fighting.

As news of the offensive filtered in, thousands of Shias took to the streets in Basra and a Baghdad district to protest. "Long live Sadr; America and Allawi are infidels," thousands of protesters in Basra chanted.

A Reuters photographer said he had seen dozens of dead militiamen in civilian houses in Najaf. He said the bodies had been taken from the battle zone and covered in ice to preserve them before burial. It was unclear when they had been killed.

Iraq's Shia cleric Ayatollah Ali al-Sistani, who is in London, called for an immediate end to the fighting in his hometown, aide Hussein Shahristani said. "All efforts should be directed to finding a peaceful solution. A military solution will resolve nothing," he said.

The latest fighting has shattered a two-month truce between US forces and their most vocal critic in Iraq. US forces claim they have killed 360 Sadr loyalists so far in Najaf. Mr Sadr's spokesmen say so far fewer have died in what is the second uprising by the militia in four months. -Reuters/AFP

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