BAGHDAD, 12 August 2004 — US Marines yesterday said they were preparing a final assault on the Mehdi Army militia in Najaf but a militia leader warned they would retaliate by bombing vital oil pipelines in the south.

The New York Times said that after preparing for a major attack on militia loyal to cleric Moqtada Sadr in Najaf yesterday, US forces called it off as it was about to begin. Sadr called on his men to keep fighting, even if he was killed.

The Times said officers described the move as a postponement and said the attack could go ahead any time. US officers with knowledge of the plans could not be reached for comment.

A senior official of Sadr’s Mehdi Army warned that militiamen would blow up pipelines in the south if US forces launched the assault.

“If the US forces attacked Najaf tonight, we will blow up the oil pipelines,” Sheikh Asaad Al-Basri, the leader of the Mehdi militia in the southern city of Basra, told reporters.

The threat came a few hours after crews finished repairing Iraq’s main southern oil export pipeline and were awaiting orders to start pumping after sabotage stopped operations for three days, an official said.

Oil prices climbed after the threat with US light sweet futures up six cents to $44.58 in floor trade, more than $1 up from the day’s low.

As a bloody showdown loomed between US troops and Sadr’s militia, thousands of his supporters vented their anger against interim Prime Minister Iyad Allawi in the streets of Nassiriyah and several other cities.

In another development, a website carried a video purporting to show militants beheading a “CIA agent” in Iraq.

The four-minute long footage showed a Western-looking man sitting on a chair surrounded by armed masked men. One of the men struck the captive’s neck repeatedly with a sword, severing his head amid shouts of “Allahu Akbar” (God is Greatest).

The video could not be immediately authenticated.

In Nassiriyah, one of seven cities where an uprising has taken hold in the past week, demonstrators torched Allawi’s political party office and called for his downfall.

The US warning in Najaf came as sporadic clashes between American troops and the Mehdi militia echoed from the heart of the southern city, where hundreds have been killed or wounded.

“Iraqi and US forces are making final preparations as we get ready to finish this fight that the Moqtada militia started,” Col. Anthony Haslam, commanding officer of the 11th Marine Expeditionary Unit in Najaf, said in a statement.

Haslam gave few details, but his threats and Sadr’s defiance have raised the stakes in a battle that is the toughest test yet for Allawi’s six-week-old government.

Most of Sadr’s men and the young cleric himself are holed up around Najaf’s ancient Shiite cemetery or the adjoining Imam Ali Mosque. Storming such symbols could touch off a firestorm among Iraq’s majority Shiite community.

In fresh violence elsewhere in Iraq, at least six Iraqis were killed and 10 wounded when a bomb exploded in a market just north of Baghdad, hospital sources said.

Despite the tightening military noose, Sadr has refused to surrender. The latest fighting has shattered a two-month truce between US forces and their most vocal critic in Iraq.

“Keep fighting even if you see me a prisoner or a martyr. God willing you will be victorious,” Sadr said in a statement.

A spokesman described the US threat as a propaganda ploy.

The crisis in Najaf appears to have created cracks in Allawi’s administration after Vice President Ibrahim Jaafari urged US troops to leave the city to end the fighting.

US forces say they have killed 360 Sadr loyalists so far in Najaf, home to 600,000 people some 160 km south of Baghdad. Sadr’s spokesmen say far fewer have died during the second rebellion by the militia in four months.

In the past 24 hours, nearly 40 Iraqis have been killed and 230 wounded in five cities including Baghdad, the Health Ministry said yesterday. The figure did not include those killed in Najaf.

Meanwhile, leading politician Ahmad Chalabi, once tipped to lead postwar Iraq, returned to Baghdad to face an arrest warrant that has rocked the country’s powerbrokers.

An Iraqi judge issued an arrest warrant against Chalabi on money counterfeiting charges last week. The judge also issued a warrant for murder against his nephew Salem Chalabi, a lawyer supervising Saddam Hussein’s trial.

Both men have denied the charges and were out of Iraq when the warrants were issued. Salem Chalabi has not returned.

— Additional in put from agencies