Mahdi Army fighters patrolled the neighbourhoods of Hurriya and Yarmouk at nightfall in brazen defiance of a curfew declared by the Government to stem Iraq’s sectarian war. The display of savagery raised fears that the attacks on Thursday, which killed 215 in the Shia stronghold Sadr City, had finally pushed the country over the edge.

American forces clashed with the militia in Sadr City, where it believes that a US soldier kidnapped a month ago is being held. But American troops were not visible in western Baghdad, where the militia rampaged with little interference.

Separately, an American helicopter wounded two people after firing on a funeral party in Baghdad, one of dozens taking place. An Interior Ministry official said it had over-reacted to the ritual firing in the air of mourners.

In the northern city of Tal Afar, which has a large Shia population, a triple car bomb attack claimed 23 lives.

The hardline Shia movement of Moqtada al-Sadr, who controls the Mahdi Army, also threw down a political challenge to Nouri al-Maliki’s weak national unity Government. The Sadr political bloc, until now the Prime Minister’s biggest backer in Parliament, said that it would pull out of the Government if Mr Maliki met President Bush next week.

Mr Maliki’s supporters insisted that he would continue with the meeting and retorted that Hojatoleslam al-Sadr could not tell them what to do. The White House also insisted that President Bush’s summit with Mr Maliki would go ahead in Jordan next week. Mr Bush’s trip is part of a wider diplomatic offensive in the region, which saw Dick Cheney, the US Vice-President, flying to Saudi Arabia yesterday for talks with King Abdullah.

In public the White House continues to express full confidence in Mr Maliki, saying that next week’s talks will focus on improving security. Privately officials are venting frustration over his reluctance to move more troops to Baghdad — where American soldiers still outnumber the Iraqi military — and challenge the power of militias, some of which have infiltrated army and police units.

Yesterday’s bloodshed showed what little power the Government has on the streets. The worst of the violence was in the northwestern neighbourhood of Hurriya, where militants seized six Sunnis, who were leaving Friday prayers, drenched them with kerosene and set them on fire. Dozens of their colleagues fanned out across the district and set four mosques ablaze.

Iraqi soldiers failed to confront the Mahdi Army during their spree, according to police captain Jamil Hussein, who added that at least 25 Sunnis were killed. The fighting started in Hurriya when Mahdi Army fighters, with Kalashnikovs and rocket-propelled grenades, attacked a mosque where Sunni gunmen were hiding, a Shia woman said. People in local shops ran for home as soon as they heard the bullets fly.

“There were so many Mahdi Army fighters. Some of them were teenagers. I saw about 21 in the afternoon. I saw them with guns, running and hiding behind buildings and blast walls. There was a man holding his gun passionately who wanted to fight. He was cursing the Sunnis, saying, ‘Damn their fathers’.” When the Iraqi Army pulled up to the besieged al-Mashada mosque, the Mahdi Army men hid their guns but stayed in the street. The soldiers knew the pedestrians were militiamen but did nothing, the woman said.

She feared that the Sadr City attack would prove the catalyst for a new wave of violence, much as the al-Qaeda bombing of a revered Shia shrine in Samarra in February unleashed an unprecedented wave of sectarian killing. “I think this is just like the Samarra bombing,” she said. “People are very angry, tense, resentful of the Government. It will go on like this — bombings, kidnappings and assassinations. The Shia are angry.”

Meanwhile, fighting raged in the western Baghdad neighbourhood of Ghazaliyah, where Shia and Sunni gunmen battled overnight and through the early afternoon. A Mahdi Army commander named Abu Maha bragged that his men had killed Sunnis in battle and then detained another half-dozen from a militant group called the Omar Brigade. “We captured six of them, questioned them. They confessed to their crimes and then we killed them,” he told The Times.

Abu Maha’s brother, a rank-and-file fighter, said that only Hojatoleslam al-Sadr could stop the fighting. He asked angrily why Sunni clerics had not issued decrees ordering Sunnis not to kill Shia. “Until now there is nothing from them,” he said. “We have started operations against the Sunnis and we will kill the Sunnis, The future will be even worse.”

In Sadr City hundreds of men, women and children beat their chests, chanted and cried as they walked beside vehicles carrying the caskets of loved ones who died in Thursday’s triple bomb attack by Sunni insurgents. Despite the curfew in Baghdad, Mr Maliki — a Shia — ordered police to guard the processions carrying the victims for burial 100 miles (161km) away in the holy Shia city of Najaf.

• The Times is the only British newspaper to maintain a full-time Baghdad bureau.

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