Mohamed Dulaimi, a doctor at Fallujah general hospital, said most of the dead and injured came from a single family whose house was hit by US forces during fighting in the eastern area of the city, which lies 50 kilometres west of the capital.
The US military could not immediately be reached for comment.
Residents had earlier said gunmen fired mortars at a US checkpoint at the eastern entrance to the city, which has been a hotbed of the Iraqi insurgency. They said US forces had attacked with aircraft and artillery.
They said several factory buildings and workshops in an industrial area of the city were damaged or set on fire.
A senior aide to Moqtada Sadr was arrested on Saturday in Karbala, said a spokesman for the radical cleric, threatening to provoke a fresh stand-off with the authorities.
Sheikh Mithal al-Hasnawi, Sadr's representative in Karbala, was arrested along with his brother in a joint raid by US-led multinational forces and the Iraqi National Guard, Sheikh Raed al-Kadhemi told AFP. "They just barged into his home at around 3:00 am (2300 GMT) and arrested him and his brother for no reason whatsoever," Kadhemi said. The multinational forces were not immediately available for comment.
Hasnawi became Sadr's representative in Karbala in early June after clashes between the cleric's Mehdi Army militia and US-led forces left hundreds dead and virtually destroyed half of Karbala's city centre, according to Kadhemi.
A Sadr official in Najaf condemned Hasnawi's arrest and demanded that he and other detainees from the movement be released.
"We demand that they be freed, and if this is ignored then we will respond at the appropriate time," warned Sheikh Ahmed al-Shaibani.
Later, police drove around Najaf using loudspeakers to warn residents that they had imposed a curfew from 11:00 pm to 6:00 am for "security reasons".
A militant group linked to al Qaeda ally Abu Musab al-Zarqawi has kidnapped two drivers in Iraq and threatened to behead them in 48 hours unless their Turkish firm stopped working there, Al Jazeera said on Saturday.
The Arabic channel aired videotape showing two men crouching in front of a group of masked gunmen. A black banner bearing the name of Zarqawi's Tawhid and Jihad group could be seen in the background.
Jazeera named the Turkish firm as Kahramanli and said the militants vowed to "apply Islamic law" and behead the hostages unless the company stopped supplying the US military in Iraq and quit the country completely.
Jazeera named the two hostages as Abdul Rahman Damir and Saeed Anwar. It did not give their nationalities.