The arrests came two days after suicide attackers set off car bombs outside police stations and a police academy in this Shiite-majority southern city, killing 74 people, including at least 16 children whose school buses were incinerated by the blast as they passed one of the stations.
Five car bombs were used in the attack, and police seized two more explosive-laden vehicles Wednesday before they could be detonated.
Basra's police intelligence chief Col. Khalaf al-Badran said police were now looking for at least one more car bomb somewhere in the city.
A group of Iraqis captured with the car bombs seized after the attacks led police to the cell, al-Badran said.
In Friday's raids, police captured two men in a truck carrying 3.5 tons of TNT in Basra's Faihaa neighborhood, then arrested the three others in a house where they found a ton of explosives, along with mortar shells and rockets, al-Badran said.
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The men led police to another house where police found 20 tons of explosives, TNT, mortar shells, rockets and artillery shells, al-Badran said.
The five confessed to working with a Syrian connected to al Qaeda who travels between Iraq and neighboring Kuwait, he said. They said they had prepared a total eight car bombs for use in Wednesday's attacks.
The vehicles used in the attacks were stuffed with explosives and rockets, police said.
Wednesday's blasts were the bloodiest attack in Basra, which has largely been spared the insurgent violence seen elsewhere in the country. Basra's Gov. Wael Abdel-Latif accused al Qaeda in the attack, though British officials responsible for security in the area said the terror network's role was not certain.
Meanwhile, L. Paul Bremer, the top U.S. administrator in Iraq, announced an easing of the purge of members of Saddam Hussein's disbanded party that will allow thousands of former Baathists to return to positions in the military and the government bureaucracy.
The announcement represented a backing down from a centerpiece of U.S. policy in Iraq after Saddam's fall — the dissolution of the Baath Party and military that were key tools of repression by the former regime. U.S. officials say the easing will still keep Baathists who committed crimes out of government.
The change comes during the bloodiest month since the U.S. occupation began, with U.S. forces fighting Sunni Muslim insurgents in the center of the country and Shiite militiamen in the south.
More military officers who served in Saddam's army but have clean records will be allowed to join the new army being constructed from scratch by the U.S.-led coalition, Bremer said.
Bremer also said teachers and professors who did not use their positions to harm Iraqis will be allowed to return. Bremer's speech was broadcast with an Arabic voiceover. A transcript of his remarks in English was not immediately available.
Only alleged criminals, expected to face trials, will remain automatically excluded along with the top four levels of Saddam's Baath party and the three most senior levels of ministries of the fallen leader's government, an official of the U.S.-led coalition had said in a telephone interview Thursday from Baghdad.
But other Iraqis who have been banned, including 14,000 discharged school teachers, will get their jobs back if they can make the case that they were party members in name only, said the official, speaking on condition of anonymity.
Saddam's Baathist party was in power for some 34 years and controlled almost all sectors of society. Teachers, civil servants and army officers were often required to join the party. Some 1.5 million of Iraq's 24 million people are believed to have been party members.
The U.S. decision to disband the military and the Baath after Saddam's fall was at first popular. But it led to widespread unemployment, especially among the Sunni minority that formed the core of Saddam's regime, some of whom joined the ranks of the anti-U.S. insurgency, Iraqis and U.S. commanders say.
The heavy-handed push of Baathists out of government positions also cost the country needed expertise at a time when it is trying to rebuild. U.N. envoy Lakhdar Brahimi criticized the de-Baathification program last week, saying, "It is difficult to understand that thousands upon thousands … of professionals sorely needed in the country have been dismissed."
Most Iraqi leaders welcomed the change announced Friday, saying the strong purge was a mistake from the start and fueled the anti-U.S. insurgency.
The move, however, is likely to face opposition, especially among Kurds and Shiites who were brutally suppressed by Saddam's Baath Party and welcomed the purge.