Interim Prime Minister Iyad Allawi's government vowed an immediate resumption of a military crackdown in Najaf, where Iraqi troops have co-ordinated with US forces against guerrillas of firebrand Shia cleric Moqtada al-Sadr.
Iraq's national security adviser Mowaffaq al-Rubaie said the Najaf talks had failed and a Sadr spokesman blamed the breakdown on Allawi.
"The talks have failed. All efforts to end this have not succeeded," Rubaie told reporters.
"The Iraqi interim government is resuming military clearing operations to...establish law and order in the holy city," he told a news conference.
Militants loyal to Sadr have been fighting with US and Iraqi forces in the sacred city of Najaf for 10 days that has killed hundreds and sent thousands of protesters onto the streets.
A truce had held since Friday but the collapse of the talks threatened a return to violence. Sadr has vowed a fight to the death to defend the holy city.
"You have to know, we had agreed with Rubaie on all points but Allawi called him back and he ended the issue," a spokesman for Sadr told the Arabic-language Al Jazeera television.
The collapse of the talks came on the eve of a national conference aimed at advancing Iraq's progress towards democracy, already overshadowed by the Shia uprising.
The national conference aims to pick a 100-member council to oversee the government after it opens in Baghdad on Sunday.
Elsewhere in Iraq, US forces said they killed about 50 insurgents near the northern Iraqi town of Samarra on Saturday, a mainly Sunni Muslim area where US troops have launched repeated raids to flush out guerrillas opposed to the presence of foreign troops in Iraq.
Warplanes screaming overhead dropped 500-lb bombs, while insurgents responded with rifle fire and rocket-propelled grenades, a US military statement said, adding there were no US casualties.
Casting doubt on the US toll, Iraqi police in Samarra said at least five people had been killed and 50 wounded in fighting in the area, 100 km north of Baghdad.
Fighting also raged between US troops and Sadr followers in the southern Shia town of Hilla overnight. Forty fighters and three police were killed, Iraq's interior ministry said, although the health ministry said 10 people were killed.
Eight Iraqis were killed and 10 others wounded, mostly women and children, on Saturday after US troops clashed with insurgents in the city of Fallujah and warplanes struck two homes, hospital sources told AFP.
"We have received eight killed and 10 injured," said doctor Ali Khamis at Fallujah's general hospital, adding that the dead included two women and two children.
The US military said earlier it struck positions suspected of being used by insurgents after they attacked marines post on the outskirts of the city west of Baghdad at about 2:00 p.m. (1000 GMT) with rocket propelled grenades, machine guns and small arms fire.
Sadr's militiamen and US troops fought sporadic clashes on Saturday in Baghdad's mainly Shia Sadr City slum, a routine occurrence in the 16-month insurgency since last year's US-led invasion.
The health ministry said 21 people, mostly civilians, had been killed and more than 270 wounded in clashes involving US forces, Iraqi police and insurgents in Baghdad, Kut and the western al-Anbar province in the past 48 hours. Allawi said last week the political process was open to all, but Sadr - buoyed by mass protests by his supporters on Friday - appeared in no mood to cut a deal as his aides said they had been offered too little too late.
Encircled by US troops in the sacred Imam Ali Mosque, Sadr pledged to stay in the city until victory or death.
"I will not leave this holy city," he told his fighters, who chanted "No, no to America" in response. "We will remain here defending the holy shrines till victory or martyrdom." Thousands of protesters from other parts of southern Iraq streamed to Najaf in a show of support for Sadr, witnesses said.
Ayatollah Ali al-Sistani, Iraq's most influential Shia cleric who has been a voice for moderation and whose health could be crucial for Iraq's future stability, successfully underwent heart surgery in London, an aide said on Saturday.
He said there was no indication when the 73-year-old would be well enough to return to Iraq.