With talks aimed at ending the siege of the shrine stalled, US forces appeared to have tightened their noose around the old city, a stronghold of militiamen loyal to cleric Moqtada al-Sadr.
Rounds of heavy-calibre fire from Bradley armoured vehicles rattled across the labyrinth of narrow streets that lead to the gold-domed shrine in Najaf, where Mehdi militias remain holed up in defiance of a government demand that they disband and leave.
A witness said US tanks advanced to their closest positions to the shrine since the siege began and drew mortar fire from Mehdi militias. There were no immediate reports of casualties from the latest fighting, which erupted after negotiators failed to agree on the terms of a handover of the shrine by Sadr's forces to Ayatollah Ali al-Sistani, Iraq's most respected Shia cleric.
Earlier on Sunday, a US military AC-130 gunship unleashed rapid cannon and howitzer fire on the militiamen.
Sadr, a young firebrand who has become a major headache for the US-backed interim government, has insisted Sistani send a delegation to take an inventory of precious items in the shrine - thought to include jewellery, relics and carpets - to head off any claim Sadr's men had stolen anything.
Sistani, in London recovering from surgery, has said he cannot form the committee in the current circumstances. Speaking through his aides, the elusive Sadr, who has called for an end to the US military occupation, had earlier said his militia would continue to guard the shrine after any handover.
Allawi had threatened to storm the shrine, but any bloody take over could infuriate Iraq's majority Shia population and further destabilise the country ahead of scheduled elections in January.
Qasim Daoud, a minister of state in Allawi's government, told a Baghdad news conference time was running out.
Nine Iraqis were killed and 27 others were injured in fighting in Najaf in the last 24 hours as of Sunday morning, the health ministry said.
While in the north of Baghdad, a suicide car bomb blew up near a convoy carrying Iraqi officials near the restive town of Baquba, killing two people and wounding eight, a police officer said.
The car bomber appeared to have been targeting Ghasan al-Ghadren, the town's deputy mayor, police said. The official was slightly wounded, the health ministry said. An Indonesian worker and two Iraqis were killed during a road ambush in the northern city of Mosul in which a Filipino was also wounded, Iraqi police said.
Five US troops have been killed in Iraq and another wounded in the last 24 hours in a series of attacks and an accident, the military said on Sunday.
Meanwhile, US journalist Micah Garen was on Sunday freed by an Iraqi group who had held him hostage in the southern Iraqi City of Nassiriya.
In Paris, the French Foreign Ministry said two French journalists, George Malbrunot of Le Figaro and Christian Chesnot of Radio France International, were missing in Iraq and had not been heard from since Thursday.
Poland wants to pull out of Iraq as soon as possible, Defence Minister Jerzy Szmajdzinski said on Sunday as he arrived at a Polish military base in southern Iraq, the PAP news agency reported.