The violence was the latest in a wave of unrest that has swept through the Sunni Muslim heartlands of Iraq in response to a huge US-Iraqi assault on the rebel hub of Fallujah.

A blazing gunbattle started at about 7:00 am (0400 GMT) in the town of Buhruz, just south of Baquba, when militants attacked a local police station, said the head of police for the province of Diyalah, Walid al-Azzawi.

A US military official, Staff Sergeant Steve Johnson, said about 20 insurgents had been killed, while Azzawi put the number of dead at seven rebels and three policemen.

The chief of police for Buhruz, Colonel Kassam Mohamed Hayali, was among the dead, said a doctor at Baquba general hospital, noting that his body had been riddled with bullets.

About 100 militants attacked the police station, while another 100 swooped on the south of Baquba, which is the capital of Diyalah province, witnesses said.

They moved in groups of about 20 and most were members of a faction led by Iraq's most wanted man, Abu Musab al-Zarqawi, or another Al-Qaeda-linked group called Ansar al-Sunna, according to the witnesses.

"We have been engaged all day," a US soldier told AFP, as four artillery rounds blasted in the background.

An AFP journalist embedded with the military in Baquba, 60 kilometresmiles) northeast of Baghdad, said that clashes rumbled into the evening and US forces were fighting to wrest control of Buhruz police station.

A bus-load of rebels drove into Baquba, 60 kilometres (37 miles) northeast of Baghdad, early in the morning, said Staff Sergeant Johnson.

Iraqi national guards and militants clashed in separate skirmishes, while other rebels were spotted planting roadside bombs, and US-led military forces in the area were attacked from a mosque, he said.

"Iraqi police have secured that mosque and coalition forces are working with the (Baquba) governor and police chief right now," said Johnson.

A weapons cache -- including rocket-propelled grenades, mortars and ammunition -- was found inside the mosque, the military official said.

US forces dropped two 500-pound (225-pound) bombs on suspected insurgent targets in the Kathoon and Sebarnisan districts on the southern outskirts of Baquba, Johnson said.

The attack was coupled with artillery strikes that pounded into the evening.

"Iraqi security forces and coalition forces are actively engaging insurgents right now," said Johnson, adding that between 80 and 85 militants were still at large.

Four US soldiers were slightly wounded during the day along with 20 people, among them three policemen, officials said.

Military commanders have warned that the week-long battle for Fallujah, once the symbol of a fierce insurgency against the US-backed government, would fan unrest elsewhere as militants fled and opened up new fronts.

While Baquba has a roughly evenly-divided Sunni and Shiite population, a majority of the violence has flared in the mostly Sunni cities of Mosul, Ramadi, Samarra and Baiji.

US forces have unleashed air strikes on Mosul and Baiji in recent days, following, they say, requests for help from the local Iraqi authorities.

"There have been several attacks in the past few days," said Johnson.

"We have been expecting increased activity," he said, citing trigger factors such as the Muslim holy month of Ramadan, which ended on Sunday, and a spike in lawlessness in Iraq's northern capital of Mosul due to the Fallujah offensive.

"A combination of these events has put (us) on alert."

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