Three months ago, standing on the main street of Jumhuriya, a former militia stronghold in Basra, would have been a death sentence for a Westerner. Nowadays, with a bit of asking around, you can actually buy a beer here, even if you cannot drink it in public.

The southern port city is recovering slowly from years of militia control and fundamentalist Islamic rule, which thousands of British troops failed to combat. In March the Iraqi Government, backed by US advisers and air power, stormed the city and declared victory over Iranian-backed death squads that were a mix of mafia oil smugglers and Taleban-style religious enforcers.

“It is better now. We have a real country,” said Abu Ali, an unemployed resident of Jumhuriya, one of the bastions of the now-defeated al-Mahdi Army Shia militia. “Before, it was very bad. We'd find two or three bodies on this street every day.”

Abu Ali, 36, was once a victim of the Shia thugs, who caught him drinking beer and kidnapped and beat him before throwing him on the street to set an example. Now, he offers to help thirsty visitors to find a few cans of overpriced Turkish brew.

The situation is similar in many former al-Mahdi Army zones, such as the bullet-scarred Tamimiya and Hayaniya, a virtual no-go zone even for heavily armoured British troops in recent years. Now shops are open late into the night and crowds throng the streets under the scrutiny of Iraqi soldiers in Humvees and sandbagged combat outposts set up every few hundred metres throughout the city. “Basrawis were dreaming of days like this. They can live under the rule of law,” Salem el-Aboudi, a 41-year-old taxi driver, said.

There is, however, still simmering discontent here. The complaints echo the scorching summer of 2003, when goodwill towards the British Army quickly evaporated amid a lack of the most basic services. “There's no electricity, no water, no sewage system,” said another man in Jumhuriya. “Why live if you have nothing?” In a tiny pharmacy in Hayaniya, a chemist said that aside from security, nothing had changed. “We are having more cases of sickness, especially typhoid in this heat; we can't drink the tap water and have to buy potable water still.”

The Government of Nouri al-Maliki, the Shia Prime Minister, has pledged $100 million (£50 million) to rebuild Basra. There is some desultory road building, but the crumbling city still looks like it could sag into the Shatt al-Arab waterway at any moment. Some worry that continued neglect will aid the return of the militias, many of whom fled to Iran but who are slowly returning home.

“If the Army stays in Basra we won't have problems, but we have to solve the investment problem; businesses must come to Basra,” a senior police official said. “Basra is safe now,” he added, while admitting that he still did not feel comfortable enough to wear his police uniform on the way to work.

The Army and police have tried to tackle rampant unemployment by offering jobs to 12,000 recruits. But Baghdad's hugely inefficient bureaucracy, hindered by corruption and nepotism, has failed to produce the salaries.

Much of the violence in Basra centred on a power-struggle for control of the country's vast oil reserves, 85 per cent of which is in the south and most of which passes through the ports in Basra and Umm Qasr. Officials say that smuggling has declined but still exists. Mohammed al-Waili,the city's longstanding Governor, suspected by many of being deeply involved, is still in power.

“It goes even beyond the governor, though,” confessed one government official, who asked not to be named. “I think it's impossible to stop it.”

Sheikh Mohammed al-Zedawee, leader of a powerful tribe in Basra, said that the military operation to secure Basra was merely the culmination of the power struggle between Shia groups inside and outside the US-sponsored Government.

“Before the operation, every party had its commission on the oil and the ports, now just two parties get everything,” he said, naming the Supreme Islamic Iraqi Council (SIIC) and Dawa, which form the backbone of the Government. He said that most of the officers involved in the security crackdown were affiliated in some way to the parties, which juggle longstanding ties to Iran with collaboration with US forces in Iraq.

“Basra is now a time bomb that could explode at any minute because of the political leaders who are controlled by the neighbouring countries, mainly Iran,” said the sheikh, who intends to run in provincial elections later this year on a slate of tribal leaders. He said that although the al-Mahdi Army was responsible for many of the killings, others were the work of groups linked to the main government parties. He said that the killers were still in the city. “We are occupied by Iran using Iraqi proxies.” Similar charges were made by leaders of the Sadrist movement, the political wing of the al-Mahdi Army. Sayyid Hassan al-Husseini, a Sadrist leader, accused the SIIC's militia, the Badr Brigades, of carrying out many assassinations, then using government spokesmen to blame the al-Mahdi Army.

This gave the Government a pretext to unleash 30,000 troops on the city and to damage the Sadr movement before the elections, he said. Most Basrawis dismiss such claims as conspiracy theories, and blame the al-Mahdi Army for the worst violence.

Many are sick of sectarian, religious politicians. Posters of imams and Moqtada al-Sadr, the young cleric who founded the al-Mahdi Army, have been torn down and replaced with adverts for cell phones and laptops, and recent polls suggested that 45 per cent of Basrawis would refuse to vote for an Islamic party.

Oil and unemployment

70 the percentage of Iraq’s oil reserves held by Basra, the country’s second-largest city and only sea port

30-60 the estimated percentage of unemployment in Basra

250 the number of commerical flights in and out of Basra each month

£50m the amount of government funds that have been allocated to rebuild the province

Sources: www.hrw.org ; www.iraqdevelopementprogram.org ; www.mod.uk

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