The US-led coalition said it was highly optimistic about reaching a peace deal with radical leader Moqtada Sadr in the central cities of Najaf and Kufa after weeks of clashes.

"According to our information, Moqtada Sadr's militiamen have begun to carry out the agreement," said a senior US commander.

A leading Shiite cleric said earlier that a truce had been called to allow negotiations to continue between the two sides.

"I am highly optimistic," the US commander told reporters in Baghdad when asked about the chances of brokering a deal.

"At the moment, all military operations have stopped".

Iraq's national security adviser Muwaffaq al-Rubaie said that the coalition had promised to respect the deal.

"The coalition authorities are aware of and have followed the negotiations very closely. They gave the talks their blessing and have promised to respect the agreement," Rubaie told a Baghdad news conference.

An AFP correspondent in Najaf said that there were less militiamen out on the streets than in recent days, but that some could still be seen hanging around, armed with assault rifles.

In Baghdad, the US officer repeated coalition insistence that Sadr dissolve his Mehdi Army militia and stand trial for his alleged role in the killing in April 2003 of a moderate pro-US cleric.

Sadr has offered to withdraw his fighters from Najaf as long as US forces pull back, as part of an agreement to end seven weeks of fighting that has left hundreds of militiamen dead.

In a signed statement, Sadr called for the postponement of the legal proceedings against him and a "broad discussion" on the future of his militia.

The military official confirmed that under the agreement, coalition forces would vacate Najaf and Kufa and return to their bases, other than guarding the governor's office and the local coalition headquarters.

Sadr's statement, read to AFP by Rubaie, followed the arrest of one of his key lieutenants and appeared to mark a climbdown on his earlier pledge to lead his followers to martyrdom.

Officials in Washington hailed the move as a "significant achievement" to end nearly two months of fighting that have left hundreds of militiamen dead.

Sadr's uprising started nearly two months ago after coalition civil administrator Paul Bremer ordered the closure of his newspaper and forces moved to enforce longstanding but previously unannounced arrest warrants against him and several key followers.

In his signed statement, Sadr agreed to the withdrawal of his followers from government buildings and the complete pullout of his Mehdi Army from Najaf, except for those who lived in the city.

He said he would allow Iraqi security forces to return to Najaf, where livelihoods, dependent on religious tourism, have been seriously damaged by the fighting.

Sadr also called for occupation forces to be withdrawn "to their bases" except for small contingents to protect coalition buildings and the provincial governor's office.

"We agreed to a truce so that negotiators can start their work," said Sheikh Mohammed Mussawi, secretary general of the Islamic Action Organisation, which has been trying to negotiate a ceasefire for weeks.

But Sheikh Ahmed al-Shaibani, a spokesman for Sadr's office, refused to put a timeframe on a militia withdrawal from Najaf.

"There are very serious efforts this time to solve the crisis but nothing official has occurred yet," he said.

Mussawi said Washington had dispatched a member of the US Congress to take part in the negotiations.

He expected Sadr to nominate a negotiator, and said he had suggested that UN and British representatives also take part in the talks.

Talk of a truce came just hours after a US military spokesman told reporters that "a very large number" of militiamen were killed in fighting Tuesday night in both Najaf and the Baghdad Shiite neighbourhood of Sadr City.

Despite the peace moves in Shiite central and southern Iraq, the longstanding insurgency in Sunni areas north and west of the capital showed no signs of abating.

The US death toll in Iraq rose to more than 800 following the killing of three US marines in the western province of Al-Anbar, the coalition announced.

Russian power company Interenergoservice meanwhile dealt a hefty blow to reconstruction efforts, withdrawing 90 of its staff in the first stage of a full pullout from Iraq, after two of its employees were killed Wednesday.

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