As many as 80 Iranian agents are working with an estimated 500 Sadr militiamen, known as the Mahdi Army, providing training and nine 57-mm Russian antiaircraft guns to add to stocks of mortars, antitank weapons, and other armaments, according to Iraqi and US intelligence reports.

"They are preparing for something, gathering weapons; people are coming in buses from other parts of Iraq," says Michael al-Zurufi, the Iraqi security adviser of Najaf Province. "The most important are the Iran- ians. The Iranian people are trying to reorganize Sadr's militia so they can fight again."

At the same time, heavily armed Sadr militiamen are waging fear tactics, kidnapping local Iraqi police and family members, occupying buildings, and arresting Iraqis deemed critical of Sadr or in violation of Islamic law, residents and officials say.

Signs that the Sadr militia is regrouping after heavy losses in April and May come even as Iraqi leaders are attempting to nudge the firebrand cleric into the political arena. Uncertainty remains over whether the militia activity is unified and sanctioned by Sadr or primarily the work of factions of his lieutenants, the officials say. Both Iraqi and US officials are concerned about signs of significant Iranian influence with Sadr's forces.

"Sadr's the wild card," says Maj. Rick Heyward, operations officer for the 25th Infantry Division's I-14 battalion in Najaf.

In response, US and Iraqi commanders are fine-tuning contingency plans for possible attacks in the city, while bolstering newly recruited Iraqi police and national guard units with machine guns and rocket propelled grenades. "Last week we bought $6,000 worth of heavy machine guns, RPG-7 rounds, AK-47s and ammunition," Najaf Province Gov. Adnan al-Zurufi said Wednesday. "We feel that this will help eliminate the threat."

Still, the governor and other Najaf officials readily admit they seek to avoid a confrontation with the Sadr militia now if possible. "We need to build ourselves, our police, our prisons," says Mr. Zurufi, who had only 10 police on duty when he took office in Najaf on May 5. "We have nothing here in Najaf now," he says as the lights flicker on and off in his downtown office, heavily guarded by Iraqi and US forces.

After Iraqi forces fled or joined Sadr's militia during the April uprising, Zurufi's administration had to rebuild them from scratch. Today, the province has 2,500 police, 800 Iraqi National Guard [ING] troops, and thousands of Iraqi guards. Still, many are poorly trained. "The police have a weak spirit, but they do their duty," admits Col. Amer Hamza, chief of staff of Iraqi police in Najaf.

Meanwhile, even their basic roles remain undefined. ING commander Akyl Khalil Bruhan complains that 500 of his 800 men are dispersed at different checkpoints, leaving only 300 as an active fighting force. "There are so many checkpoints, we don't have enough forces to control the area," he says.

Confusion over security roles led to a friendly-fire incident in Najaf earlier this week, when an ING patrol reported 80 Sadr militia had taken over a local hospital. ING and police surrounded the building and exchanged fire with forces at the hospital, only to learn that they were from Iraq's Facilities Protection Service.

Meanwhile, Sadr militia pressure local forces in Najaf as well as the nearby Shiite cities of Karbala, Hilla, and Diwaniya. "They are still trying to muscle the local security forces and set up illegal checkpoints," says Capt. Sean Stinchon, intelligence officer for the 1-14 battalion.

Negotiation, not confrontation

Shortfalls in Najaf's fledgling forces are one reason Governor Zurufi has taken a conciliatory stance toward aggressive moves by the militia.

For example, about 60 Sadr militiamen moved back into their office at an old movie theater in Diwaniya this week, painting it with graffiti saying "Death to the occupiers" and "the new Iraqi government is a puppet." Local officials gave them a deadline of midnight Tuesday to leave, but did nothing when the militia continued to visit the building.

Two weeks ago, after the militia captured about 10 Iraqi police following a hours-long firefight at the police station near the Imam Ali shrine, Zurufi negotiated a prisoner swap.

US commanders view such appeasement as setting a dangerous precedent - not only for Najaf but for all Iraq. Yet they have few options other than to follow the lead of their Iraqi counterparts. "The night the governor decided to exchange the prisoners was a hard night for the American soldier," says Col. Richard Longo, the 1st Infantry Division commander who oversees US forces in the region.

Only two weeks ago, US soldiers were seeking to kill or capture Sadr, who faced an arrest warrant issued by an Iraqi court for murder. "The government has to decide what they're going to do with Sadr and his group now," says Colonel Longo.

For his part, Gov. Zurufi makes it clear he has no intention of arresting Sadr now, preferring to delay action until after Iraqis elect a government. "I haven't received any order from Baghdad about arresting him, and I think it's a bad idea," Zurufi says. "Moqtada is a very simple person. he's not a leader who can control a million people, but we are making him a big shot."

As for Sadr's militia, US commanders believe it is using its sanctuary in Najaf either to project power outward to Baghdad's Sadr City and other Shiite centers around the country, or to regroup and wait for a call to arms. "We know what they are doing in there [the exclusion zone] but we can't do anything about it," says Longo. "They are trying to draw the Iraqi security forces into a fight."

Popular - and feared

Sadr's forces are operating in two large "exclusion zones" on either side of Najaf: the Najaf cemetery and Imam Ali shrine, and the nearby district of Kufa. They are storing weapons in the guarded cemetery, a maze of crypts and catacombs that offers endless hiding places and fighting positions. Near the shrine, they operate from unfinished buildings. US forces do not enter the zones, which are only sporadically policed by Iraqi security.

Posters of Sadr are plastered around the zone, an indication of his popularity, especially among young people. Still, many others live in fear under the shadow of the militia's heavily armed enforcers.

"They kidnapped me and my 5-year-old son. There's no law, no government. I've complained to the police but they don't do anything about it," says Bdour Kathem Jabar, who lives in Kufa. "The militia doesn't let us say anything bad about Sadr. They walk around in groups, sitting down at shops or cafes and setting their guns everywhere to make the people afraid."

Militia men often "arrest" residents and take them before an Islamic court that the government had sought to outlaw. Crimes include "criticizing Moqtada, selling movies and CDs, listening to music," says Michael al-Zurufi. "Even if you only swear at the militia they will arrest you and beat you up with cables and big sticks."

Many residents admit in low voices that they don't like Sadr. "Overall, I'm not happy with Sadr. We want to live in a secure, stable environment. Obviously he's shooting everywhere, attacking people, destroying things," says wheat farmer Abdul Sada Jasem.

"Sadr will win by using politics, not by picking up weapons and fighting again," says Qassam Rasoul Abd, who works in the Najaf engineering and planning department.

The fighting in Najaf has caused an economic downturn. Pilgrims who were flooding in illegally at the rate of 10,000 a day have been turned away because they lack visas - also because the governor is concerned about the influence in Najaf of Iranians, some of whom have been captured among the Mahdi Army. "Security is more important" than the lost revenues from pilgrims, he says. "I believe the tourist companies were the face of Iranian intelligence."