U.S. soldiers killed three Shiite extremists who attacked the troops with small arms and rocket launchers in Sadr City, the military said Monday, despite a reported cease-fire in the Iraqi capital's sprawling Shiite slum.

The clashes broke out Sunday afternoon, marring the first day of a reported cease-fire between factions of Muqtada al-Sadr's political movement, who are thought to have influence over the extremists, and the Iraqi government.

Nasar al-Rubaie, a Sadrist lawmaker, said talks on final touches to the agreement were still underway on Monday. Al-Rubaie said he could not comment on the latest clashes in Sadr City.

Meanwhile, Iraqi police and army forces launched a crackdown in the southern city of Basra at down Monday to pursue suspected Shiite extremists and seize weapons, said Maj. Gen. Mohammed Jawad Huwaidi, the security commander in Basra.

Around 10 suspects were arrested and 62 machine guns and 20 rocket launchers were seized in overnight raids in Basra, Huwaidi said.

The clashes in Baghdad's Sadr City slum flared late March after Prime Minister Nouri al-Maliki ordered a crackdown on armed Shiite factions in Basra, the nation's second-largest urban area.

Iraqi health officials on Monday said the latest clashes in Sadr City left two people dead and 25 wounded. They could not provide a breakdown for casualties and it was not clear if there were any militants among them. They spoke on condition of anonymity because they were not authorized to speak to the media.

The U.S. military said soldiers fired a 120 mm round from an Abrams main battle tank early Monday and killed one militant. Two militants were killed in separate clashes on Sunday, it said.

The clashes erupted hours after U.S. military spokesman Rear Adm. Patrick Driscoll warned Sunday that a truce had not yet been brokered and that the Iraqi government and Shiite representatives were still talking.

There was no immediate comment Monday from the Iraqi government.

The U.S. military expressed hope for a diplomatic solution to seven weeks of fighting in Baghdad's Sadr City that houses nearly half the capital's six million people.

The U.S. military has repeatedly said its clashes are with rogue elements of al-Sadr's Mahdi Army. The bulk of al-Sadr's 60,000-strong Mahdi Army is not believed to have participated in the fighting, instead adhering to a general cease-fire ordered by al-Sadr last August.

Iraqi troops launched an operation inside Sadr City after militants began firing hundreds of rockets and mortars toward the heavily fortified Green Zone. Hundreds of people were killed or injured by the attacks and the subsequent fighting in the slum that is home to 2.5 million people.

In an effort to prevent extremists from using the southern section of Sadr City, U.S. and Iraqi forces are building a barrier — reaching up to a height of 12 feet — to isolate it and disrupt supply and escape routes for militants. It will enclose a 1.2 square mile area that houses nearly 800,000 people.

About 80 percent completed and with just two weeks remaining until it is done, the walled-in area will resemble many others around Baghdad.

Hundreds of civilians have fled their homes and aid groups claim some areas are desperately short of food and medicine after seven weeks of street battles. But the U.S. military said there was no humanitarian crisis and markets around Sadr City were open.