More than 150 hard-line Iraqi fighters remained shuttered Thursday inside the gold-domed Mosque of Ali, while hundreds of demonstrators took to the streets of Najaf to keep U.S. troops from entering the Shiite Muslim shrine.

An uneasy peace finally descended on this holy city in southern Iraq, with U.S. troops pulling back from the mosque after the loyalists defied orders to abandon it.

"The city OK, the Mosque of Ali no!," the locals chanted before calm was restored.

American helicopters flew above the shrine, dropping leaflets urging surrender by the barricaded members of the Baath Party and the Fedayeen Saddam.

Abdel Majid al-Khoei, who arrived in Najaf early Thursday, said local clerics were attempting to negotiate a deal where Iraqi loyalists would leave the mosque in return for safe passage out of the city. Al-Khoei heads a London-based philanthropic group, and his father was a revered Shiite cleric who died in 1993.

Any damage to the shrine by U.S. forces could ignite rage in the Islamic world. The Ali Mosque holds the tomb of the Shiites' most beloved saint, Imam Ali Ibn Abu Talib, the Prophet Muhammad's cousin and son-in-law.

With its silver-covered tomb, ceramic-ornamented walls and resplendent golden dome and minarets, the shrine is considered a treasure of Islamic art.

Ayatollah Sayyid Ali al-Husseini al-Sistani, a Shiite leader who had been under house arrest in Iraq, issued a fatwa instructing the population to remain calm and not interfere with coalition troops, said Brig. Gen. Vincent Brooks, deputy operations commander at U.S. Central Command.

"We are seeing evidence of other religious leaders who have had enough of this regime," Brooks said.

But the Iraqi government said al-Sistani, who has millions of followers inside and outside Iraq, issued no such call.

The U.S. troops imposed full control over Najaf except for the shrine and the surrounding streets, said al-Khoei. Most local residents seemed unaffected by the military presence, but were adamant about keeping the soldiers away from the vicinity of the mosque.

"We will try to reopen the government offices, hospitals and the markets," said al-Khoei. "A lot of the people are in dire need of food and medicine after the city was besieged for a full week."

On Wednesday, U.S. officials accused Iraqi forces of firing on coalition troops from inside the mosque. Brooks called the shooting "a detestable example of putting historical sites in danger" and said U.S.-led forces refused to return fire.

For the world's nearly 120 million Shiites, Najaf is the third holiest city, behind Mecca and Medina in Saudi Arabia.

Najaf, whose name in Arabic means "a high land," is located about 100 miles south of Baghdad on a high desert plateau overlooking the world's largest cemetery, where Shiites aspire to bury their dead.

Najaf is also the seat of the Shiites' spiritual leaders, known as ayatollahs, and the center for scientific, literary and theological studies for the Islamic world.

U.S.-led troops first occupied the city on Wednesday, and they were reportedly welcomed by a crowd of cheering Iraqi civilians. That attitude could change if anything happens to the mosque.

"Iraq may have misused the sacred places, but they are defending themselves in their own country against foreign aggressors," said Mousa Qorbani, a hard-line Shiite cleric. "Any harm to the holy shrine will provoke unspecified severe consequences for the aggressors."