The new "Fallujah Brigade," put together by Iraqi generals from Saddam Hussein's ousted regime, likely will include some former army soldiers who fought American forces over the past month, Marine Lt. Gen. James Conway conceded.
He promised, however, that anyone who has "blood on their hands" would not be allowed to stay in the force.
Another military official acknowledged that the United States didn't know who the individual members of the force were and that its fighters and commanders still had to be vetted to ensure that they are not connected to crimes of the Saddam regime. The force's leadership could be changed soon because of the screening process, the official said on condition of anonymity.
Scores of Iraqis gathered in the streets Saturday morning, some flashing "V" for victory signs and raising the Iraqi flag. Motorists drove through the streets, shouting "Islam, it's your day!" and "We redeem Islam with our blood!"
Some were masked with kuffeyahs and raised automatic weapons, like members of the insurgency that put up stiff resistance against the Marines. Some guerrillas drove through the city, honking horns and waving their guns out the windows.
Meanwhile, violence continued Saturday,.
A U.S. soldier was killed when a rocket-propelled grenade hit his convoy near the town of Qarraya, 45 miles south of Mosul, the military said. A second soldier died Saturday of wounds suffered the day before in a roadside bombing in the same area.
In other developments:
In another Saturday bombing, two foreign contractors were killed and five other foreigners wounded in an attack in the northern city of Mosul, according to the U.S. military and witnesses. Nationalities of the victims were unavailable.
A British foot patrol also came under attack in the southern city of Amarah, sparking a gunbattle with insurgents that left five Iraqis dead and six British soldiers wounded, according to witnesses and a British forces spokesman.
Witnesses said the five Iraqis killed were members of radical Shiite cleric Muqtada al-Sadr's al-Mahdi Army.
The clashes were ongoing Saturday night, said British Royal Air Force Squadron Leader Jonathan Arnold, a military spokesman. He confirmed the six British wounded but had no information on Iraqi deaths.
The new "Fallujah Brigade," led by Maj. Gen. Jassim Mohammed Saleh, fanned out and imposed a cordon around nearly the entire southern half of Fallujah, replacing Marines who were pulling back to set up a second cordon, some five miles from the city.
By Saturday, all 700 Marines of the 1st Battalion, 5th Regiment had pulled out of the industrial zone in southern Fallujah, their main forward base in the city.
If all goes well on Fallujah's south side, the Iraqi force will next replace Marines in the north within a few days, the military official who spoke on condition of anonymity said.
"We are not leaving, we will be right there behind them and will move in if things go wrong," the official said.
CBS News Correspondent James Acosta says, "The next critical test for American forces comes in a few days, when a U.S. convoy attempts to drive through the heart of Fallujah, under the protection of local Iraqis. How that drive goes may show whether this new alliance was the right road to take."
The Marine withdrawal proceeded despite the deaths of four U.S. troops Friday in the volatile region west of Baghdad. Two Marines were killed in a car bombing near Fallujah and two sailors died in another incident in the same province.
The willingness to install a relatively unknown armed force with ties to the ousted regime at the forefront of the Fallujah standoff was a sign of U.S. eagerness to find a way out of the siege, which raised an international outcry and angered many Iraqi leaders who supported the United States.
A U.S. officer, speaking on condition of anonymity, said the Fallujah model, though not a "hard and fast" policy, might be applied elsewhere.
The force came about suddenly - a dramatic reversal less than a week after the United States was threatening to launch a new offensive into Fallujah. The former generals approached Marine commanders and offered to take over security duties in the city using their own former soldiers, the military official said.
Malik Khalif, who fled the city during the fighting, looked at the remains of his destroyed house. "I don't mind losing and sacrificing my life or my properties for the sake of the honorable resistance of Fallujah," he said.
Conway, commander of the 1st Marine Expeditionary Force, insisted that the U.S. withdrawal did not mean a let-up in the pursuit of the guerrillas. He said Saleh - who served in Saddam Hussein's Republican Guard and as a commander of the Iraqi army's 38th Infantry Division - has presented a plan to confront the city's hard-core militants.
"They understand our view that these people must be killed or captured," Conway said. "They have not flinched. And their commander has said as much to his assembly of officers."
Conway said the Iraqi force will be made up of 1,100 fighters, mostly former army soldiers. Another senior U.S. military official, speaking on condition of anonymity, said about 700 fighters had been gathered under the force so far.
The Fallujah Brigade, effectively, turns some of the insurgents - those who joined for money or resentment at losing their jobs when Saddam's army was disbanded last year - against the more ideological anti-U.S. guerrillas.
Former Iraqi generals are putting together the force, and the ex-soldiers have been their "recruiting pool," Conway said. He added that he could not rule out that some of the recruits may have fired on his Marines.
"I'd like to think that has not been the case, but I can't say categorically that it hasn't," he told reporters outside of the city.
The senior U.S. military official said the brigade may be more or less a reconstitution of Saddam-era military units from the Fallujah area.
Conway said he was not concerned that the Iraqi forces, which will be under his overall command, might carry out atrocities or resort to unlawful methods in its hunt for insurgents. But he said Marines would be quick to stop them if they did.