Assailants ambushed a convoy of Britons on a northern Baghdad highway on Sunday, killing one Iraqi security guard and a bystander, officials and witnesses said. U.S. soldiers came under fire in a Shiite holy city as an agreement to halt fighting there appeared to be unraveling.

Two American soldiers were wounded in the clashes around the holy city, Najaf (search), the military said. Fighting erupted Sunday night in Najaf's twin city Kufa (search), and Shiite militiamen accused the Americans of firing near the main mosque, damaging its outer wall.

In a televised report from Kufa, =a reporter embedded with 1st Armored Division (search) troops said a "major firefight" broke out late Sunday when soldiers tried to secure a police station. Soldiers were quoted as saying it was the most intense fighting in the area in the past six weeks.

The attack in Baghdad's Shoala district occurred near dusk as the convoy of sport utility vehicles headed south toward the city center. Gunmen in an approaching vehicle opened fire, sending three SUVs swerving off the road into barricades.

Crowds of Iraqi youths danced and cheered as rescuers dragged a bloodied body, wearing a flak vest, from the driver's seat of one vehicle. Others looted tires and set two vehicles on fire.

Two witnesses, Khalid Zaalan, 22, and Qays Hussein, 15, said there was a shootout, and armed Western men jumped from the wrecked SUVs, commandeered a passing car at gunpoint and escaped.

In London, the British Foreign Office said four Britons and another Iraqi jumped out of the vehicles, flagged down a passing Iraqi vehicle and escaped. None of the Britons was hurt, but the Iraqi was wounded, the statement said.

A Foreign Office spokeswoman dismissed as rumor some witness reports that Western-looking men were abducted by the attackers.

A family of three was caught in the crossfire, according to Dr. Mazhar Abdullah of the nearby al-Sadr hospital. The husband was killed and his six-months-pregnant wife was seriously injured, the doctor said.

A preliminary report from the 1st Cavalry Division (search), responsible for security in Baghdad, said one Iraqi security guard was killed and another was wounded. The report did not mention any missing personnel or an escape.

On Monday, two British civilians working for a security company died when a roadside bomb blew up their armored car near the coalition headquarters in Baghdad.

Elsewhere, attackers in Samarra, 75 miles northeast of the capital, Baghdad, hurled three mortar shells into a market, killing three and injuring four, said Rashid Abdullah, a hospital official.

In Najaf, 100 miles south of Baghdad, Shiite politicians sought to save a three-day-old agreement with radical cleric Muqtada al-Sadr (search) to end the standoff with U.S. soldiers in the holy city and restore government control there.

Al-Sadr's fighters took over Najaf and its twin city Kufa in early April after occupation authorities cracked down on his militia, closing his newspaper, arresting a key lieutenant and announcing an arrest warrant against him for the murder of a rival cleric. The crackdown triggered an uprising in the once quiet Shiite areas in which hundreds have been killed.

Under a deal announced Thursday with Shiite leaders, al-Sadr agreed to remove his fighters from the streets and begin a dialogue with the clerical hierarchy over the future of his militia and the warrant against him. U.S. troops agreed to halt offensive operations around Najaf and Kufa.

However, daily clashes since the agreement was announced have threatened to scuttle the deal. About 150 policemen sent from Baghdad to replace local policemen who deserted returned to Baghdad — ostensibly because of lack of accommodation for them.

The move threatens to delay the start of joint patrols — considered the key to shoring up security in the city as al-Sadr's militiamen return to their homes.

On Sunday, U.S. troops and al-Sadr's fighters exchanged gunfire near Najaf's Valley of Peace cemetery — the largest burial ground in the Muslim world. Puffs of white smoke rose above the tombstones as Shiite gunmen fired rocket-propelled grenades at U.S. tanks. One Iraqi was killed and four were injured, hospital officials said.

"The situation is very tough, and it looks like there's no solution," merchant Ammar al-Khafaji complained. "Inside the city, people are afraid."

On Saturday, the U.S.-appointed governor of Najaf, Adnan al-Zurufi, accused al-Sadr of failing to honor the truce.

Despite the clashes, Governing Council member Ahmad Chalabi, who traveled to Najaf to help shore up the agreement, told reporters there was a "a momentum for peace" and the fellow Shiite leaders were "working to implement this so we can avoid any clashes."

Chalabi met with al-Sadr's aides Sunday night and afterward told reporters he had worked out a "detailed plan for the implementation" of the truce agreement and would present them to U.S. and Iraqi officials Monday.

"We ask both sides to stop hostilities," Chalabi said.

Following clashes around the cemetery, an explosion rocked the center of the city, sending black smoke over Revolution of 1920 Square. Gunfire immediately broke out, injuring two people fleeing the scene.

In Baghdad, a dispute between Iraq's Governing Council and U.S. occupation authorities over the president of a new transitional government delayed formation of the new Cabinet to take power June 30.

A council member, who spoke on condition of anonymity, said the U.S. governor of Iraq, L. Paul Bremer, and special U.N. envoy Lakhdar Brahimi were exerting "massive pressure" on the U.S.-appointed group to choose former Foreign Minister Adnan Pachachi, a Sunni Muslim councilman.

However, the current council chairman, civil engineer Ghazi Mashal Ajil al-Yawer, was believed to be the choice of most of the 22 members.

Council members conferred through the night Sunday and were expected to convene again Monday — the deadline set by U.N. special envoy Lakhdar Brahimi to announce the new government lineup.