Insurgents struck at the heart of Iraq's economic livelihood Wednesday, blasting a major pipeline to halt vital oil exports and killing the top security chief for the northern oilfields.

A rocket slammed into a U.S. logistics base near Balad (search), 50 miles north of Baghdad, killing three U.S. soldiers and wounding 25 other people, including two civilian workers, the military said.

A mortar exploded in central Baghdad after midnight, setting off sirens in the U.S.-controlled Green Zone headquarters. The coalition said there were no casualties or damage. A rocket or rocket-propelled grenade also landed in the walled garden of the Palestine Hotel (search), headquarters of numerous Western news organizations, but failed to explode.

Several explosions also were heard early Thursday in the capital, but they appeared to be controlled blasts.

Elsewhere, radical Shiite cleric Muqtada al-Sadr (search) ordered his militiamen to leave the holy cities of Najaf and Kufa unless they live there, fulfilling a key aspect of an accord meant to end fighting between his fighters and U.S. troops.

An explosion before dawn Wednesday damaged a pipeline carrying crude oil from Iraq's southern fields to the Basra oil terminal in the Persian Gulf. Iraqi engineers had diverted crude shipments to that pipeline after another was bombed two days ago.

"Due to the damage inflicted on the two pipelines, the pumping of oil to the Basra oil terminal has completely stopped," said Samir Jassim, spokesman of the state-owned Southern Oil Co. "Exports have come to halt."

Exports were halted last month through Iraq's other export avenue — the northern pipeline from Kirkuk to Ceyhan, Turkey — after a May 25 bombing, Turkish officials said.

Gunmen killed Ghazi Talabani, the official in charge of protecting the northern oilfields, in an ambush in Kirkuk. Gen. Anwar Amin of the Iraqi Civil Defense Corps (search) said three gunmen attacked Talabani's car after his bodyguard briefly left the vehicle in a crowded market.

The bodyguard was wounded. Talabani was the third Iraqi official slain since Saturday.

"What you are seeing here is effectively a terrorist war against Iraq's critical infrastructure, including the oil infrastructure," coalition spokesman Dan Senor said in a televised interview. "It is an effort to basically, economically, impoverish the Iraqi people."

President Bush, in a speech beamed live to U.S. forces worldwide, said democracy was being born in Iraq despite the killings and pipeline attacks.

"We have come not to conquer, but to liberate people and we will stand with them until their freedom is secure," Bush told several thousand troops at MacDill Air Force Base, Fla., home of the U.S. Central Command. "By helping the rise of democracy in Iraq and Afghanistan and throughout the world, you are giving people an alternative to bitterness and hatred, and that is essential to the peace of the world."

Al-Sadr's order to his fighters does not remove the militia presence from Najaf and Kufa, since most of his followers in the twin cities live there and are not affected.

However, the order is a major step toward ending the uprising al-Sadr launched in April after the coalition closed his newspaper, arrested a top aide and issued an arrest warrant for him in the 2003 murder of a rival cleric. Hundreds died in the uprising. Skirmishes continue between U.S. troops and the al-Sadr's followers in Baghdad's Sadr City (search).

In Sadr City, an al-Sadr lieutenant and cleric, Abdul-Rahman al-Shuaili, told mourners at Wednesday's funeral of a militiamen killed by U.S. soldiers that the militia "will continue fighting the occupation" because "we want them out of our city and out of the other Iraqi cities."

However, after nearly eight weeks of fighting, officials of the U.S.-led coalition have tacitly agreed to let the new government and the Shiite leadership deal with al-Sadr, whom the Americans had once threatened to "capture or kill."

Iraqi officials said they hoped to repair the southern pipelines in a few days, and the disruptions were not expected to have a substantial effect on world petroleum supplies. Although Iraq has the world's second-largest petroleum reserves after Saudi Arabia, sabotage and decrepit facilities have prevented it from taking a leading role in global oil markets.

The economic and psychological effects in Iraq are more far-reaching, coming during a surge in violence ahead of the June 30 transfer of sovereignty to Iraqis.

The two southern pipelines export about 1.7 million barrels a day, according to the Middle East Economic Survey. Each day that the southern lines are closed will cost Iraq about $50 million, said Walid Khadduri, an expert on Iraq's oil industry.

Pipeline sabotage "has a large psychological effect on the markets and leads to higher prices," independent economist Jassem al-Saadoun told The Associated Press. "The issue here is not that of supply and demand, but a political one that has to do with instability in the area, including what is happening in Saudi Arabia" — scene of recent deadly attacks on foreign workers.

Insurgents have stepped up attacks on Iraqi industrial sites to undermine support for the interim Iraqi government that takes power at the end of the month.

Also Wednesday, Deputy Defense Secretary Paul Wolfowitz, one of the architects of the Iraq war, began talks with the interim Iraqi leadership. Coalition officials say about 60 percent of the Iraqi government already has been transferred to Iraqi control, including 15 of the 26 ministries.

Wolfowitz met with interim Prime Minister Iyad Allawi and others. Afterward, the coalition said the talks were "just the beginning of a new relationship between the government of Iraq and the members of the coalition."

Iraq's new leaders have begun to assert their independence, speaking out against some positions taken by their U.S. backers. Allawi told an Arab TV station Monday that Iraq wants to take custody of Saddam Hussein, although Bush said the transfer must wait until security arrangements are adequate,

President Ghazi al-Yawer has insisted on the return of the Republican Palace, now used as coalition headquarters; the Americans want to use it for office space.

In other developments:

— An Iraqi police officer was killed and five Iraqi civilians were wounded when a roadside bomb exploded near a U.S. convoy in Ramadi. U.S. Marines arrested seven Iraqis, including six members of the Iraqi Civil Defense Force, for alleged involvement in the attack, military officials said.

— Coalition officials said they would hand over the civilian part of Baghdad International Airport to Iraqi authorities about July 1 and the military side by mid-August, a senior coalition official said.