U.S. Marines negotiated a plan Thursday to pull back forces from Fallujah (search), a move that could lift a nearly monthlong siege and allow an Iraqi force led by a former Saddam Hussein-era general to handle security. Fresh clashes broke out despite news of the proposal, and U.S. warplanes dropped bombs on insurgent targets.

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U.S. military commanders met with former Iraqi generals Thursday to discuss details of the Fallujah proposal, Marine Capt. James Edge said.

However, U.S. officials in Washington and Iraq gave somewhat differing accounts on the status of any agreement.

A Marine commander in Iraq said a deal was reached but later said "fine points" needed to be fixed.

Deputy Defense Secretary Paul Wolfowitz said there was no deal yet and officials were "still working on it."

Pentagon spokesman Larry Di Rita said he could not rule out that an agreement was in (AP) - place, but he said the U.S. military command in Baghdad told him that they could not confirm it.

In an apparent gesture to help the Fallujah negotiations, U.S. authorities Thursday released the imam of the city's main mosque, Sheik Jamal Shaker Nazzal, an outspoken opponent of the U.S. occupation who was arrested in October.

One possible sticking point was a U.S. demand for insurgents to turn over those responsible for the March 31 killing and mutilation of four American contract workers, whose bodies were burned and dragged through the streets. Di Rita said winning assurances that the perpetrators would be turned over remains a U.S. goal of the Fallujah talks.

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It could even include gunmen who fought with guerrillas against the Americans - particularly ex-soldiers disgruntled over losing their jobs when the United States disbanded the old Iraqi army, another Marine officer said, speaking on condition of anonymity.

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As negotiations continued, so did the fighting that Fallujah has seen since the beginning of the week. Marines and guerrillas skirmished, with blasts and sporadic gunfire heard from the northern part of the city. Residents reported buildings on fire.

Three F/A-18 Hornets flying off the aircraft carrier USS George Washington in the Persian Gulf dropped three 500-pound bombs Thursday on targets in the Fallujah area in support of Marines, Navy spokesman Lt. Cmdr. Danny Hernandez said.

Witnesses reported rockets fired into the Golan neighborhood, a bastion of the insurgency, and two houses were on fire. Ambulances and fire engines had to turn back amid the gunfire. Marines and guerrillas have clashed repeatedly in the northern district since Monday.

Inside the city, some residents breathed a sigh of relief at news of a pending deal.

"I will be so happy today. I'm hoping for a quiet night without bombs or explosions," said Hassan al-Halbousi, who spent the entire siege alone in his house after sending his family to Baghdad.

"I can't believe what we have gone through," he said. "The bombing has terrified me. No one is in the streets."

None the less, US commanders around Falluja have been appealing for more firepower.

The Pentagon, in a reversal of policy favouring lighter units, said it was sending dozens of main battle tanks and other armoured vehicles.

About two dozen heavy M1A1 Abrams tanks will attempt to end the siege within days.

But UN Secretary-General Kofi Annan appealed to US President George Bush to show restraint in Falluja.

"The more the occupation is seen as taking steps that harm the civilians and the population, the greater the ranks of the resistance grows," Annan told a news conference in New York.

The marines started a gradual withdrawal to a wider perimeter Friday as the first 200 members of the new Fallujah Brigade moved into parts of the city.

US commanders hope the Iraqi force, made up mainly of former members of ousted dictator Saddam Hussein's disbanded army, will be able to restore some form of law and order to Fallujah, a city partly controlled by anti-coalition forces.

US Marines withdrew today from positions in the southeast of Fallujah and civilians began returning to this embattled city as US commanders met with local representatives to work out details of a deal to lift the month-long siege.

If the deal is finalised, it would effectively turn over control of the city to a 1,100-member force under the command of an Iraqi general who was once part of Saddam Hussein's feared Republican Guard.

One possible sticking point could be a US demand for insurgents to turn over those responsible for the March 31 killing and mutilation of four American contract workers, whose bodies were burned and dragged through the streets. That triggered the siege of Fallujah.

However, the United States has been under intense pressure from the United Nations, its international partners and its Iraqi allies to end the bloodshed, in which hundreds of Iraqi civilians are believed to have died.

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"Fallujah residents have chosen Maj. Gen. Jassim Mohammed Saleh to form and lead a unit that will be in charge of protecting the city," said Iraqi Brig. Gen. Shakir al-Janabi, who expects to be part of the new force. "Our force will handle the security issue today in cooperation with Iraqi police."

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Despite the negotiations, skirmishes continued between Marines and guerrillas. Three F/A-18 Hornets flying off the aircraft carrier USS George Washington in the Gulf dropped three 500-pound bombs yesterday on targets in the Fallujah area, Navy spokesman Lt. Cmdr. Danny Hernandez said.

Witnesses reported rockets fired into the Golan neighbourhood, a bastion of the insurgency, and two houses were on fire. Marines and guerrillas have clashed repeatedly in the northern district since Monday.

Led by one of Saddam Hussein's generals, Iraqi troo ps replaced U.S. Marines on Friday and raised the Iraqi flag at the entrance to Fallujah under a plan to end the monthlong siege of the city. A suicide car bomb on the outskirts that killed two Americans and wounded six failed to disrupt the pullout of Marines from bitterly contested parts of the city.

The two deaths on the final day of April raised the U.S. death toll to 136, making it the deadliest month for American forces - as well as for Iraqis - since President Bush launched the war in March 2003.

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Convoys of U.S. troops and equipment could be seen heading out of parts of Fallujah, replaced by Iraqi troopers in red berets under the flag that flew over Saddam's Iraq.

Residents said that by Friday evening, U.S. troops had left several neighborhoods that had seen heavy fighting, including Nazzal, Shuhada, Nueimiyah and an industrial area. As U.S. Marines moved out, Iraqi police and civil defense units moved in.

Witnesses saw Marines withdrawing from positions in the southeastern part of the city on Friday and handing them over to the Iraqis.

Hundreds of people in Falluja have taken to the streets to welcome a former officer of the Iraqi army who has taken control of the city, following a pullout by US occupation forces.

People waving Iraqi flags and Iraqi security forces cheered the former officer of Saddam Hussein's Republican Guard Jasim Muhammad Salih, wearing his old army uniform, when he entered the town centre and gave a speech on Friday

The former officer said he was forming a military unit to restore calm to the bloodied Iraqi city of Falluja after an agreement with US occupation forces.

Salih, who a relative said had been chief of staff of a Republican Guard brigade, said the force would help Iraqi security forces bring order to the town, so US forces would not be needed.

He did not say who would make up the unit.

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The 1st Battalion, 5th Marines Regiment withdrew from frontline bases in the abandoned factories and garages of Falluja's southern industrial zone, witnesses said.

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The withdrawal came after Lieutenant General James Conway, who commands the 1st Marine Expeditionary Force, held closed-door talks with a group of Iraqis.

A much-abused ceasefire in Falluja was announced earlier this month, but occupation forces pounded parts of the city from the air on Thursday even as talks proceeded.

The airstrikes in Falluja in the past three days by American warplanes and helicopter gunships have been the most intense aerial bombardment in Iraq since major combat ended nearly a year ago, military officials said Thursday.

In the past 48 hours, Air Force F-15E and F-16 warplanes, and carrier-based F-14 and F-18 fighter-bombers, have dropped about three dozen 500-pound laser-guided bombs in three different sections of Falluja, Air Force officials said, destroying more than 10 buildings and 2 sniper nests identified by troops as sources of attacking fire, and other targets.

By day, AH-1W Super Cobra helicopters have hovered over the city, launching Hellfire missiles at guerrillas who fire on the Marines. By night, lumbering AC-130 gunships have pounded trucks and cars ferrying fighters with the distinctive thump-thump of 105-millimeter howitzers. British Tornado ground-attack planes are also flying missions over Falluja, and remotely piloted Predator reconnaissance aircraft prowl the skies.

That effort continued Friday as convoys of U.S. troops and equipment headed out of parts of Fallujah, replaced by Iraqi troops in red berets, serving under the flag that flew over Saddam's Iraq.

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There are other efforts, as well, to try to resolve the situation in Fallujah. Members of the Iraqi Governing Council and city leaders, for instance, issued a statement in mid-April calling on the insurgents to turn in their heavy weapons. Few weapons have been surrendered.

Under cover of darkness, U.S. Marine snipers hunting the insurgents of Falluja spent a long night on Iraq's desert sand, emerging with little but frustration.

"We were on some very exposed ground and we didn't get anyone," said an exhausted Lance Corporal Migel Nunez, 22, of Elgin, Texas.

It was their tenth ambush mission in Iraq, none of which killed or captured a guerrilla near the city, site of a weeks-long standoff with guerrillas who the U.S. military says include Saddam Hussein loyalists and foreign Muslim militants.

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Overnight Thursday, the sniper unit attached to Golf Company returned to a village they left just hours earlier, hoping to ambush guerrillas who might have returned.

As soon as their noisy armoured vehicle approached, every household in one hamlet turned off its lights and then switched them on again when they left, an apparent signal to guerrillas.

"The Americans have violated the ceasefire. They are attacking us with jet fighters, tanks and artillery. The US snipers are on every roof and minaret. They don't care who they shoot. They are shooting old people, women and children.Where is the UN in all this?"

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Abu Mohammad, 30, who left the town yesterday morning, said: "There is no electricity. There is no water. There are no food supplies at all." He said the US warplanes and helicopters that have been pounding Falluja for the past three days had been targeting civilian areas.

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The Bush administration has tried to portray the insurgents inside the city as either foreign fighters or diehard supporters of Saddam Hussein. On Wednesday, Tony Blair described them as "former regime elements" and "outside terrorists".

Yesterday, however, those from Falluja could not understand Mr Blair's claim. The insurgents were not terrorists but Iraqis, they did not support the old regime and were merely fighting a patriotic war against American occupation. "The people doing the fighting are locals," Mr Mohammad, who fled with his wife and six children,said. "They are not people who support Saddam."

Others complained that the Americans had created the problem in the Sunni town west of Baghdad by using indiscriminate and excessive force which was more appropriate to a battlefield than a residential area.

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Muthana Harith al-Dhari, spokesman for the Muslim clerics' association which has been attempting to mediate in the Falluja standoff, said the coalition's analysis of the situation in the town was fundamentally wrong.

Dr al-Dhari admitted some Saddam supporters could be inside the town but put their numbers at "no more than 100". Alone, they would not be able to defy the US military, he pointed out. "This is a widespread and popular revolt based on Islamic principles," he said, adding that a similar insurgency was going on in the southern city of Najaf - a Shia area with no Saddam supporters at all.

After word of the agreement made its way though Fallujah, insurgents resumed firing on Marines, some of whom were preparing to depart. The exchange of fire prompted commanders to summon airstrikes, and Navy fighter jets dropped at least three 500-pound bombs on the city.

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Ahmed Hardan, a physician who led a group of Fallujah residents in earlier negotiations with U.S. forces, said on the al-Arabiya satellite channel that the latest deal calls for U.S. troops to move out of the city's southern neighborhoods by early Saturday and to leave the northern part of Fallujah beginning Sunday.

The Marines will be replaced by a new militia called the Fallujah Protection Army, which will consist of 900 to 1,100 Iraqis who served in the military or other security services under former president Saddam Hussein, Marine officers said. The militia will be commanded by a group of former Iraqi generals, the officers said.

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"We have recently seen the occupation authority's policy going in curves, without purpose or direction," Grand Ayatollah Mohammad Taqi Mudaressi, a scholar who has cast himself as an Islamic reformer, said at a news conference. "We must tell the coalition authority that force cannot fix things, that we need more wisdom, understanding and dialogue to avert escalating violence."