At the southern entrance to Sadr City several Iraqi men on the US military’s payroll are sweeping the street in the latest attempt to stop al-Mahdi Army militia from recruiting new fighters.

The number of people working on such US-funded projects is tiny, however, because Shia militants loyal to the anti-American cleric Moqtada al-Sadr have ordered many in this Baghdad slum to stay away. Other residents simply prefer not to be associated with US troops, who are largely denounced as occupiers.

The hostility seems likely to become even worse after Hojatoleslam al-Sadr issued an ultimatum at the weekend giving warning of “open war” unless Iraqi and US forces halted their attacks against his fighters in Sadr City, the southern oil hub of Basra and elsewhere across the Shia-dominated south of Iraq.

His threat was followed by the worst fighting in Sadr City of the past fortnight, with US soldiers killing 23 militants, wounding three and arresting three between Saturday night and yesterday morning, according to a US military spokesman. “There has been an uptick in violence,” Lieutenant-Colonel Steven Stover said.

The escalation of fighting has brought despair for many civilians, who complain that they are tired of being trapped in the firing line. “We in Sadr City are in a very bad situation,” Ahmad Jafaar, 33, a labourer, said. “The Iraqi and US forces can’t distinguish between the civilians and fighters. We are stuck in hell between two fires.” He said that there was “no food, no water, no power, no medicines”.

Al-Mahdi Army fighters are waiting for Hojatoleslam al-Sadr to give the word to end a ceasefire that has been in place since last August. They believe this is the only reason that Iraqi forces have managed to make gains in Sadr City and Basra, after an offensive launched four weeks ago by Nouri al-Maliki, the Prime Minister.

Condoleezza Rice, the US Secretary of State, applauded the Government for taking a tough line against the militia. “It is indeed a moment of opportunity in Iraq, thanks to the courageous decisions taken by the Prime Minister and a unified Iraqi leadership,” she said during a visit to Baghdad, where she met Mr al-Maliki as well as Jalal Talabani, the Iraqi President. A rebellion by al-Mahdi Army, which has tens of thousands of fighters, could end a period of reduced violence at a time when US forces are starting to leave Iraq. Hundreds of people have been killed in Basra and during clashes that have flared across southern Iraq since the offensive started.

Hojatoleslam al-Sadr’s spokesman in the holy city of Najaf said yesterday that no deadline had been set for Mr al-Maliki to respond to the threat of war. “[Hojatoleslam al-Sadr] has hit the ball into the Government’s court,” said Sheikh Salah al-Obeidi. Al-Mahdi Army fighters in Sadr City, which has 2.5 million people, are ready to make a stand. “We need a big reaction to prove that we are here,” Abd al-Zaha-ra’a, a local commander, said.

Travelling through the southern quarter of Sadr City with a unit of US soldiers at the weekend, sporadic gun-fire could be heard in the distance. Soldiers were on alert constantly to the threat of sniper fire or hand grenades.

US and Iraqi forces have pushed into the south of the district in an attempt to prevent militants from firing rockets at the fortified Green Zone, which came under repeated attack after the start of the Basra offensive on March 25. They are building a concrete wall to partition off the sector, which was once home to a hugely popular market but now lies largely closed and deserted after being badly damaged by mortar fire.

US commanders say that the wall will protect civilians from militia attacks, but residents are less convinced, arguing that it feels like a prison. An Iraqi major said that militants were using the barriers to hide behind and launch attacks.

Captain Alex Carter is part of a four-man team that has been given the task of helping to stimulate the local economy and improve access to essential services. He has employed 90 young men on a three-month contract to sweep the streets in yellow bibs, each earning $10 a day.

“The key constituent group for us is males aged 18-to30,” said the officer. The aim is to give males of fighting age a regular salary, which in theory should stop them from looking to the militia to earn money. Captain Carter said, however, that intimidation from the militia had scared off potential recruits. Two contractors that he had hired since August had been killed.

Militia man

— The al-Mahdi Army was formed in June 2003 by Hojatoleslam Moqtada al-Sadr, below, to protect Shia religious institutions

— In 2004 he led a bloody uprising in the city of Najaf

— He says that his militia is preparing the way for the Mahdi, a messiah believed by Shias to be their 12th imam, who disappeared in the 9th century

— Initially the group was small, made up of 500 to 1,000 combatants. Its numbers swelled dramatically and it began seizing ground – notably in Najaf and Sadr City, Baghdad.

— By August 2006 the militia had 60,000 fighters

— Last summer he called a truce that has been credited with reducing much of the violence in Iraq

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