NAJAF, Iraq, Aug 18 (AFP) - Moqtada Sadr will disarm his militia and leave a holy shrine following a ceasefire, an aide to the radical Shiite Muslim cleric said Wednesday, hours after Iraq's defence minister threatened to crush his rebellion.
But US national security advisor Condoleezza Rice warned that Sadr could not be trusted to keep his word and that he would have to be "dealt with."
And an armed group in Iraq meanwhile threatened to kill a kidnapped American journalist unless US forces withdraw from Najaf within 48 hours.
"An armed group calling itself 'Martyrs Squad' has announced that it is holding American journalist Micah Garen ... and threatened to kill the hostage after 48 hours if US forces do not withdraw from the city of Najaf," Al-Jazeera television in Doha reported.
The news channel aired a video in which the presumed hostage is shown with five hooded gunmen in the background, one of whom is reading a statement which is not audible.
The announcement in Najaf that Sadr would disarm his militia came after the cleric had refused to meet delegates from Iraq's national conference who had braved fierce fighting to journey to the shrine of Imam Ali.
Sadr's camp had cited unexplained security reasons for not meeting with them.
"Sayyed Moqtada Sadr has sent a message to the national conference in which he accepted all the conditions extended to him, but there must be a ceasefire for the steps to be implemented," said one of his aides, Ahmed al-Shaibani.
"I have in my hands the acceptance letter from the Sadr movement and from Sayyed Moqtada Sadr on the three points put forward by the conference," Jalil al-Shamari, from a dissident branch of the Shiite religious Dawa party, also told the conference in Baghdad earlier.
On Monday, delegates had passed a resolution calling on Sadr to disarm, abandon the Imam Ali shrine and transform his organisation into a political party.
"Today, he has accepted the three points to end to Iraqis' bloodletting and demonstrated his desire to take an active role in the new Iraq," Shamari said.
Rice, speaking to CNN television, said the Iraqi government "has been very clear with Sadr that he has to do some things, leave the shrine, that he has got to disband his militia.
"Nobody is taking Sadr at his word," she said. "He's someone from whom you have to see action. He said lots of words before. He has never followed through on them. And I don't think you're going to see an Iraqi government that's going to take his word."
Sadr "can't have a militia running the streets," said Rice. "He can't occupy the holiest shrine in Shiadom. He has to be dealt with and I'm quite certain he will be."
At least 12 people were killed and 14 wounded during fierce fighting between Sadr's militia and US troops backed by helicopter gunships, in Najaf's historic Old City, medics said.
Gunfire and mortar attacks continued into the evening.
US forces supported by Iraqi security forces have effectively trapped Sadr's Mehdi Army inside the shrine area. Police are also patrolling the city and have slapped a night-time curfew on the city.
The government had stepped up its rhetoric against Sadr, vowing to unleash a formidable assault if he failed to surrender.
"The coming hours will be decisive and we will teach them a lesson they will never forget," Defence Minister Hazem al-Shaalan told reporters in Najaf earlier in the day. "In the coming hours they must surrender."
A statement from Prime Minister Iyad Allawi asserted: "The Iraqi government will not sit idly by in the face of this insurgency, but is serious about restoring security and stability in the holy city as soon as possible."
The cleric's abrupt about face came as it emerged that some of his retinue had been shortlisted for Iraq's new interim legislature, due to be elected later Wednesday.
Elsewhere, five Iraqis were killed and 20 wounded when a mortar bomb slammed into a market in the centre of the main northern city of Mosul, medics said.
At least another four other people were killed when their minibus was trapped in a shoot-out between US forces and insurgents near the southern city of Kut, police and the military said.
Iraqi police said five women students were killed and another five wounded, while the military put the death toll at four.
A US marine was killed in the troubled western province of Al-Anbar as was a soldier in Baghdad, bringing to 705 the number of US soldiers killed in action in Iraq since the 2003 US-led invasion to topple Saddam Hussein.
US soldiers also killed two prisoners when a fight got out of control at Iraq's notorious Abu Ghraib prison, at the heart of a US prison abuse scandal earlier this year, the US military said.
And a Turkish truck driver kidnapped in Iraq at the weekend has been released and is on his way back to Turkey, Ankara said.
NATO experts have meanwhile begun training Iraq's new army, a spokesman said.