US troops and Iraqi national guardsmen have been training for "major assaults" against Sadr's fighters, hunkered down in the holy city of Najaf of central Iraq during seven days of fighting, the US military said.
"Iraqi and US forces are making final preparations as we get ready to finish this fight that the Moqtada militia started," said marine commander Colonel Anthony Haslam.
But Sadr pressed his supporters to fight to the end, in a statement handed out in Najaf.
"If I die a martyr or if I am taken prisoner, I urge the Mehdi Army to continue to fight the occupation forces," he said.
Twenty people were killed and 50 wounded when British forces, backed by air power, pounded strongholds of Sadr's militia in the city of Amara, medics said.
At British headquarters in Iraq's main southern city of Basra, a spokesman said multinational forces had used "appropriate force in a very targeted and precise manner" against militiamen who persisted in attacking coalition bases.
Further north in Kut, which fell briefly to Sadr supporters during the cleric's previous uprising in the spring, two Iraqi national guardsmen and three police were wounded in morning clashes, a doctor said.
In the capital, the National Security Council said the closure of a southern oil pipeline, following a militia threat of attack on Monday, had halved Iraqi crude exports and led to daily losses of 30 million dollars.
"If the entire pipeline is blocked, Iraq will suffer from a daily 60 million dollar financial loss," it said.
The disruption to supplies on Tuesday helped push New York crude prices briefly to a record of more than 45 dollars a barrel. Although they later fell back, prices continued their march upwards in trading on Wednesday.
At least 195 people have been killed and almost 1,000 wounded in Sadr's fresh uprising, according to an AFP toll based on government, hospital, Mehdi Army and US military figures.
Meanwhile, Iraq's foreign hostage crisis shot back to prominence with the snatching of two Jordanians in 24 hours, as Sofia confirmed a body found in Iraq had been identified as that of a second Bulgarian hostage kidnapped last month.
He was killed by a group linked to the Al-Qaeda network, along with the other hostage.
Meanwhile, a scientist who headed Iraq's nuclear programme said deposed Iraqi leader Saddam Hussein had given up all weapons of mass destruction in the wake of the 1991 Gulf War.
"There was no capability. There was no chemical or biological or any what are called weapons of mass destruction," Jaffar Dhia Jaffar said in what BBC television called his first-ever broadcast interview.
Speaking in Paris, where he now lives, Jaffar -- who ran Saddam's nuclear programme for 25 years -- said there was "no development" of chemical, biological or nuclear weapons "at any time after 1991".
He said he knew that for a fact "because I am in touch with the people concerned".
Saddam's quest for weapons of mass destruction -- and the fear that they might fall into the hands of global terrorists -- was one of the prime reasons given for the US and British invasion of Iraq in March 2003.
Nearly 18 months on, no such weapons have been uncovered -- a fact that both US President George W. Bush and British Prime Minister Tony Blair have been forced to concede.
Jaffar told the BBC he remained loyal to Saddam's regime until he slipped out of Iraq via Syria two days before the fall of Baghdad which signalled the collapse of the longtime Iraqi dictator.
The nuclear scientist -- who was educated in Britain, and has been described by some as the father of Iraq's nuclear programme -- said he had been approached by the United States to defect, but was never tempted to do so.
Meanwhile, disgraced Pentagon favourite Ahmed Chalabi returned to Iraq where he faced arrest for banknote foregery, as his political party refused to vacate its entire Baghdad headquarters as demanded by the government.
"He is back home among his folks," senior Chalabi aide Mithal al-Alusi told AFP. "He will shower, have some tea and then resume his national duties."
But judge Zuhair al-Maliky, who issued the warrant for his arrest along with that of nephew Salam Chalabi over murder charges reiterated that nothing had changed.
"The arrest warrant still stands. Now it's up to the police and the interior ministry to execute it," he said.
In Washington, a US official denied that a CIA agent had been beheaded in Iraq, as claimed by an Islamist website that broadcast a video purporting to show the decapitation.
"The man depicted in the video is not a CIA official," the official told AFP, on condition of anonymity.
"No CIA official is missing," the official said, adding that the Central Intelligence Agency knew the whereabouts of all of its agents.
An Islamist website on Wednesday showed a videotape which it said was of a US national and CIA agent being beheaded by members of a Islamic militant group in Iraq.
In the poor-quality video, whose authenticity could not be verified, a young Western-looking man is seated on a chair surrounded by five hooded gunmen, one of whom uses a long knife to cut through the man's neck and then brandishes the head.