Jets roared overhead as massive explosions and tank and machine-gun fire boomed through the city and smoke engulfed its historic centre, home to the Imam Ali shrine, revered by Shiites the world over.
Thousands of US forces, backed by Iraqi police and national guard, mounted a pincer assault to trap Moqtada Sadr's fighters in the heart of the city, before going on to raid the militia leader's home, which was unoccupied.
Iraqi and US troops sealed approaches to the mausoleum, as hundreds of terrified residents fled through the dusty streets.
"Leave the city. Help coalition forces and do not fire at them," one announcement instructed in Arabic. "We are here to liberate the city."
Armed militiamen fanned out into the deserted plaza outside the shrine as mosques urged Sadr's Mehdi Army to defy the onslaught and defend the city.
By dusk, one militiamen had been killed and 25 wounded, while one civilian was killed and three others injured, said the clinic inside the shrine.
The government said the joint offensive would continue and demanded that the Mehdi Army quit the holy shrine, but pledged US forces would not be allowed to enter the sacred mausoleum.
"The operations are continuing... and will continue until the militia is forced out or they surrender," Defence Minister Hazem al-Shalan told a press conference in Baghdad.
In Najaf, the militia, still in control of the area around the shrine, vowed to fight until the bitter end.
"We are ready to fight until the last drop of blood if this is what the Americans want," said Sheikh Ali al-Sumeisim.
Various efforts were underway to defuse the standoff. The government's point man on security, Muwafaq al-Rubaie, headed to Najaf in a bid to meet with Sadr and end the assault.
The Najaf office of Iraq's revered Shiite Muslim spiritual leader Grand Ayatollah Ali Sistani also said it was working with all sides for peace.
Envoy Hussein al-Shahrastani said that if Sistani had predicted the scale of the crisis he would never have left for medical treatment in Britain.
"We ask all sides to immediately renounce arms to save Muslim blood and the sanctity of the city," he said.
But Iraq's top Sunni Muslim body warned the security forces against supporting the US military.
Early Thursday, Najaf deputy governor Jawdat Kadam Najem al-Kuraishi and half of the 30-member provincial council resigned in protest against US "terrorist operations" and the "hasty US invasion" of Najaf.
The UN Security Council meanwhile voted unanimously to extend the mandate of the UN Assistance Mission for Iraq by one year.
The mandate for the mission, created on August 14, 2003, was to expire on Friday.
And in Washington, the United States declared its military operations in Iraq were not covered by the so-called Olympic truce it signed at the United Nations last year.
On the eve of the opening of the 2004 Olympics in Athens, the US State Department said US troops fighting in Iraq would not be bound by the terms of the truce that calls for all nations in conflict to observe a traditional ceasefire during the Games.
Twenty-four hours of nationwide fighting in Iraq, mostly in the Shiite south and Sadr's Baghdad stronghold, has claimed 165 lives and wounded 594, the health ministry said.
In Baghdad's district of Kadhimiyah and the British-patrolled southern oil city of Basra, thousands of people protested against US attacks on holy cities, held aloft pictures of Sadr and denounced Prime Minister Iyad Allawi.
A British soldier was later killed in the city when his patrol was struck by a homemade bomb -- the second British soldier to die in 72 hours in Iraq.
Further north, in Kut, which fell briefly to the Mehdi Army in Sadr's spring uprising against the US-led occupation, heavy overnight US bombing killed 84 people and wounded 176, medics said.
US planes pounded the southern Al-Shakia district, a densely populated Mehdi Army stronghold, but medics said many of the dead were women and children.
In the Baghdad militia stronghold of Sadr City, two people were killed after they attacked a US patrol, the military said.
The uprising, which has fanned out across Shiite cities south of Najaf and forced the closure of a southern oil pipeline, has halved Iraq's crude exports and led to losses of about 60 million dollars, the government said.
Fighting in Najaf and heightened Mehdi threats against oil infrastructure saw world oil prices soar to all-time highs.
New York's light sweet crude for delivery in September, shot up to an unprecedented 45.50 dollars a barrel in early trading. London's benchmark Brent North Sea crude for September exceeded 42 dollars for the first time.
A shadowy Shiite militant group also threatened to kill all those working with British troops in the region. It was not clear if the group had any direct links with the Mehdi Army.
In Baghdad, US planes roared overhead as a sign of force when Mehdi Army militia attacked a police station in the centre of the capital and police called for US back-up, the militia said.