A massive strike on the rebel-controlled city of Fallujah (search) could be imminent if a peace deal isn't reached soon, Iraq's leader warned Friday.

Interim Prime Minister Ayad Allawi (search) said an attack by U.S. and Iraqi forces on the city could begin soon. Troops want to clear the region of insurgents in order to be able to hold elections in January as scheduled.

U.S. warplanes pounded Fallujah late Friday in what residents called the strongest attacks in months as more than 10,000 American soldiers and Marines massed for an expected assault.

"We intend to liberate the people and to bring the rule of law to Fallujah," Allawi told reporters in Brussels after meeting with European Union (search) leaders. "The window really is closing for a peaceful settlement."

Residents reached by telephone said the aircraft were striking targets in the central city market that had not been hit since April. There was no confirmation from American officials.

Meanwhile, in Baghdad, a huge column of black smoke rose over the city's Karrada district after midnight, and residents said they heard heavy gunfire, presumably between police and militants. No one answered the phone at the local police station.

Earlier Friday, U.S. planes dropped leaflets urging women and children to leave the Fallujah, residents said.

Sunni clerics have threatened to boycott the election if Fallujah is attacked, and U.N. Secretary-General Kofi Annan (search) has warned U.S., British and Iraqi authorities that a military campaign and "increased insurgent violence" could put elections at risk.

Coalition jets struck the city with five air raids in 12 hours overnight Thursday, softening up the insurgent stronghold. Guerrillas responded with a rocket attack Friday afternoon, killing a U.S. soldier and wounding seven others, the U.S. military said.

U.S. soldiers sealed off roads into the city overnight. Iraqis closed a crossing point along the Syrian border, Syrian officials said.

American officials plan to use a mixed American and Iraqi force to storm Fallujah, 40 miles west of Baghdad, if Allawi gives the go-ahead.

"We have been asked by the people of Fallujah to help them liberate them from the terrorists and insurgents," Allawi said, adding that most of the city's civilian population had left.

The rocket attack occurred about 1:20 p.m. local time Friday against a U.S. position outside Fallujah. Clashes were reported at other checkpoints around the city and in the east and north of Fallujah late in the day.

In another incident, mortar shells exploded on a small U.S. base at Saqlawiyah west of Fallujah, the military said. U.S. troops returned fire, killing an undetermined number of insurgents, the military said.

U.S. aircraft struck targets around Fallujah in numerous raids starting late Thursday and continuing into Friday night. Targets included a system of barriers rigged with bombs, a command post, suspected fighting positions and a weapons cache, according to Lt. Nathan Braden of the 1st Marine Division.

Late Friday, U.S. jets went into action again, striking several targets in the Jolan sector of northern Fallujah, residents said. Jolan is considered one of the most heavily defended neighborhoods in the city. As the night dragged on, the attack was expanded to targets in the center of the city, according to residents. Artillery fire could also be heard. The drone of U.S. aircraft heading toward Fallujah could be heard over the Iraqi capital Baghdad.

U.S. Marines are concerned that Fallujah is full of booby traps and are trying to prepare for that possibility when they storm the city, FOX News has learned.

If they fight, American troops will face an estimated 3,000 insurgents. Military planners believe there are about 1,200 hard-core insurgents in Fallujah — at least half of them Iraqis. They are bolstered by insurgent cells with up to 2,000 fighters in the surrounding towns and countryside.

Washington Post reporter Jackie Spinner, embedded with a Marine unit near Fallujah, told FOX News on Friday that she had heard bombs hitting the city for days. Marine and Army units had also been readying their weapons and vehicles for an upcoming assault, she said.

"It's clearly an outpost preparing for battle," Spinner told FOX. "Everybody is ready for something big to happen. They want to get in and finish the job they say they started in April. We'll have to wait and see what happens."

Iraqi authorities have put together a team of Iraqi administrators to run Fallujah after the fighting, Marine Maj. Jim West said Thursday. West said $75 million has been earmarked to repair the city.

"This will be a key test for Iraqi forces," U.S. Army Lt. Col. Tim Eads told FOX News on Friday. "Everybody will be watching these guys. I imagine that they know it too and don't want to fail ... I think no matter what, it's going to be pretty quick."

The U.S.-led offensive will target not only regular Iraqi insurgents, but also Islamist followers of Abu Musab al-Zarqawi (search), the Jordanian militant who recently swore allegiance to Al Qaeda and by his own admission has kidnapped and beheaded several Americans and other foreigners.

"I think the one thing al-Zarqawi knows after Nov. 2 [when President Bush was re-elected] is that he's a dead man," Eads told FOX.

Meanwhile, insurgents killed two American Marines and wounded four others in fighting west of Baghdad, the U.S. military said Friday.

The two Marines were killed Thursday in Anbar province (search), which includes Fallujah, but the Marines refused to say where and how they died. In addition, a U.S. soldier was killed and another wounded when a roadside bomb hit their vehicle Thursday north of Baghdad.

Three British soldiers with the Black Watch regiment were killed, and eight wounded, Thursday south of Baghdad when a homicide driver blew up his vehicle at a checkpoint. An Iraqi translator also died in the attack.

It was the single biggest loss of life for the British military since August 2003.

It came only days after the Black Watch detachment, made up primarily of Scottish soldiers, had moved from the relative safety of southern Iraq to a base near Baghdad in order to free up U.S. forces for the Fallujah offensive.

British Prime Minister Tony Blair (search) had agreed to the U.S. request to move British troops to central Iraq despite considerable opposition at home, even within his own Labour Party.

Also Friday, U.S. Marines fired on a civilian vehicle that did not stop at a checkpoint in Fallujah, killing an Iraqi woman and wounding her husband, according to the U.S. military and witnesses. The car didn't notice the checkpoint at the time, witnesses said.

"Marines fire upon vehicles only as a last resort when verbal and visual warnings to stop fail. Such was the case today," the Marines said in an e-mailed response.

The head of the Iraqi election commission said national balloting would be held in the last week of January but also that no precise date had been set. He denied media reports that the elections had been scheduled for Jan. 27.

The commission also said that Iraqis who live outside the country would be allowed to vote. Commission spokesman Fareed Ayar said the government planned to establish voting centers in countries with large Iraqi populations. Details of how many centers, where they would be located and which countries would be involved had not been finalized, he said.

The deteriorating security situation prompted the humanitarian organization Medecins Sans Frontieres (search), or Doctors Without Borders, to announce it was closing its operations in Iraq. CARE International (search) withdrew from the country after its national director, Margaret Hassan, was kidnapped last month.

An Iraqi known for cooperating with Americans was killed near Ramadi, police said. The assailants stopped a car carrying Sheik Bezei Ftaykhan, ordered the driver to leave and pumped about 30 bullets into the sheik's body, police said.

The wave of violence in Iraq has also been marked by the kidnapping of more than 170 foreigners, more than 30 of them killed, since Saddam Hussein's regime fell in April 2003.

On Friday, Nepal's Foreign Minister confirmed a Nepalese man abducted by gunmen Monday along with an American, a Filipino, and three Iraqis had been freed by his captors in Baghdad. Two Iraqi guards were released earlier in the week.

The American, whose identity has not been released, and Filipino accountant Robert Tarongoy, 31, are still missing. Both worked for the Saudi Arabian Trading and Construction Co., based in Riyadh.

A Lebanese American contractor was also seized in Baghdad earlier this week. His captors have also not identified themselves.

However, two Lebanese hostages held for more than a month were freed after a ransom was paid, one of the former hostages said Friday. Marwan Ibrahim Kassar and Mohammed Jawdat Hussein were released unharmed Wednesday and returned to Lebanon.

In other developments Friday:

— Four buses carrying Shiite pilgrims to Karbala plunged into a river near Latifiyah in central Iraq, killing 18 people on board, when the drivers apparently failed to see that a bridge had been destroyed two days earlier by insurgents, said Dr. Dawoud al-Taie of nearby Mahmoudiya Hospital.

— A private security company, Global Risk Strategies, said a British contractor was killed in a suicide car bombing at Baghdad airport Wednesday that also injured several Iraqi civilians.

— In Muqdadiyah, north of Baghdad, a mortar shell targeting a police station fell short, killing two children in a nearby home, police said.

FOX News' Catherine Donaldson-Evans, Bret Baier and The Associated Press contributed to this report.