Although the town of Madain is only 20 miles from Baghdad, where the new parliament was meeting, nobody seemed able to explain exactly what was happening in the lawless area on the southern edge of the capital, renowned for its kidnappings, Islamic extremists and highway mafia.

General Rashid Felayeh, commander of one of three Interior Ministry commando brigades that were rushed to the area, said that Sunni terrorists were holding 100 to 150 Shia residents hostage and were threatening to kill them if Madain’s Shias did not leave town. He said that on Friday night between 45 and 55 gunmen had arrived in the ethnically mixed town and started to pull local residents out of their cars. Now they were holding them in three locations in the southern part of Madain.

US troops surrounded the town as Iraqi forces deployed amid confusion over whether hostages had been rescued.

“This technique is ethnic cleansing,” said Jawad al- Maliki, an official of the United Iraqi Alliance, which, despite a decisive win in the elections in January, has failed to cobble together a government with the powerful Kurdish block.

The area around Madain and nearby Salman Pak has long been out of official control. Iraqi security forces have ceded the towns to criminal gangs and Sunni extremists. In response, Shia militias, including members of the Badr Corps, the armed wing of the main Shia party in the National Assembly, have formed, triggering tit-for-tat kidnappings and murders.

The escalation, from localised tribal reprisals to an attempt at “ethnically cleansing” the town, sparked fears of civil war in which US forces could be caught between Sunni and Shia militias.

“The terrorists are Sunnis. Their aim is to split Iraq,” General Felayeh told The Times.

Iyad Allawi, the outgoing caretaker Prime Minister, spoke of the seriousness of the crisis. “Unfortunately, evil powers are trying to disturb the peace of our country, stop progress, destroy Iraq, keep killing innocent civilians and planning for the start of ethnic, sectarian and religious division,” he said.

Qassem Dawoud, the interim National Security Adviser, said that a big offensive would be launched by the end of the week against those towns in the area that had become strongholds of kidnappers and rebels. “These are terrorist activities aiming at stirring civil war.”

In the same area south of Baghdad, security forces found 19 corpses, many of them badly decomposed, of people who had been killed by criminal gangs. In scenes reminiscent of Bosnia’s civil war, Sunni guerrillas were also blamed for an explosion that destroyed an historic Shia mosque near by.

Reports of the fighting were confused. Defence Ministry officials declined to comment on the stand-off, then later said that troops had retaken part of Madain in intense fighting.

Mr Dawoud denied that a rescue operation had been launched. Saad Dulaimi, a Sunni council member from Salman Pak, said that he had heard nothing of the hostage crisis and several witnesses said that the town was calm.

In the northern city of Mosul, two senior security officials were shot dead. Three

US soldiers died in a mortar attack on their base in the western Sunni city of Ramadi. Marla Ruzicka, the American founder of the Campaign for Innocent Victims In Conflict, was killed in Baghdad on Saturday.

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