Despite Prime Minister Nouri al-Maliki'sto lay down their arms and sign an agreement to abandon violence by Friday, government troops in Basra were having trouble making inroads into neighborhoods that the radical Shiite cleric Muqtada al-Sadr's Mahdi Army has controlled for years.
Residents spoke of militiamen using mortar shells, sniper fire, roadside bombs and rocket-propelled grenades to fight off security forces.
Basra has been the scene of fierce fighting between opposing Shiite groups as government forces try to establish control.
The city is the hub of southern Iraq's oil industry - home to about 80-percent of the country's vast reserves. The Thursday blast set off a raging fire in a pipeline used to transport crude oil to tanks at both of Iraq's Persian Gulf exporting terminals.
An official says the bombing will undoubtedly have an impact on exports, which only recently had been on the rise. There was no immediate indication as to who was behind the explosion.
Meanwhile, television video showed black smoke rising from inside the Green Zone, a large sectioned-off area of central Baghdad where the U.S. Embassy and many other key buildings are located.
An official at the U.S. Embassy told CBS News that a building inside the embassy complex had caught on fire as the result of a rocket landing nearby, but that no injuries were reported and the fire had been put out. Thursday was the fourth day in a row to see rockets and mortars land inside the highly-fortified Green Zone.
CBS News chief foreign correspondent Lara Logan reports the Green Zone, not long ago one of the safest areas of Baghdad, has become in recent days one of the deadliest.
In a visit to one of the foreign embassies inside the area, Logan says she and her crew had to quickly move into protective bunkers four times within one hour due to the relentless rocket fire. She says all non-essential movement of personnel within the Green Zone has been restricted.
The U.S. military said Wednesday that 16 rockets had slammed into the U.S.-protected Green Zone. One soldier with the U.S.-led coalition, two American civilians and an Iraqi soldier were wounded in the attacks, it said. At least 11 Iraqis were killed elsewhere in the capital by rounds that apparently fell short, police said.
A Pentagon official said reports from the Basra area indicate that militiamen had overrun a number of police stations and that it was unclear how well the Iraqi security forces were performing overall. The official spoke on condition of anonymity because he was not authorized to discuss the matter publicly.
Al-Maliki, a Shiite, remained in Basra to supervise a crackdown against the spiraling violence between militia factions vying for control of the center of Iraq's vast oil industry, located near the Iranian border. The events threatened to unravel a Mahdi Army cease-fire and spark a dramatic escalation in violence after a monthslong period of relative calm.
Street battles that broke out Tuesday in Basra and Baghdad's main Shiite district of Sadr City spread to several other neighborhoods and southern cities, leaving nearly 140 dead, including civilians, Iraqi security forces and militants. That two-day figure was a rough estimate provided by police and hospital officials who could not give a more specific breakdown.
Two American soldiers were also killed Wednesday in separate attacks in Baghdad, the military said, raising the overall U.S. death toll since the war started more than five years ago to at least 4,003, according to an Associated Press count.
The Sadrists are angry over recent raids and detentions, saying U.S. and Iraqi forces have taken advantage of the August cease-fire to crack down on the movement.
They have accused rival Shiite parties, which control Iraqi security forces, of engineering the arrests to prevent them from mounting an effective campaign after the Iraqi parliament agreed in February to hold provincial elections by the fall.
Anthony Cordesman, an analyst at the Washington-based Center for Strategic and International Studies, cautioned against dismissing those concerns.
"The current fighting is as much a power struggle for control of the south, and the Shiite parts of Baghdad and the rest of the country, as an effort to establish central government authority and legitimate rule," he said in an analysis.
The U.S. military insisted the fight was not against al-Sadr's movement but breakaway factions believed to be funded and trained by Iran, which has denied the allegations.
"This is not a battle against the Jaish al-Mahdi nor is it a proxy war between the United States and Iran," military spokesman Maj. Gen. Kevin Bergner said, using the Arabic term for the Mahdi Army. "It is the government of Iraq taking the necessary action to deal with criminals on the streets."
President Bush told The Times of London in an interview published Wednesday that the Iraqi government's decision to "respond forcefully" was a "positive moment in the development of a sovereign nation that is willing to take on elements that believe they are beyond the law."
There is minimal U.S. presence in Basra, Iraq's second-largest city 340 miles southeast of Baghdad.
British forces turned over responsibility for Basra to the Iraqis in late December but say they will assist the Iraqis upon request.
British troops have remained at their base at the airport outside Basra and were not involved in the ground fighting, although British planes were providing air surveillance, according to the British Ministry of Defense. It said the Iraqis had not asked the British to intervene.
Some 2,000 Iraqi troops reinforcements were sent to Basra, where gunfire echoed through the streets.
Sadiq al-Rikabi, a chief adviser to al-Maliki, said gunmen in Basra who turn over their weapons to police stations by Friday and sign a pledge renouncing violence will not face prosecution.
"Any gunman who does not do that within these three days will be an outlaw," he said.
Despite the government presence, the militiamen appeared to be holding their positions.
Khaldoon Faisal, a 35-year-old taxi driver in Basra's Jamhoriyah area, said the Mahdi Army was putting up fierce resistance with grenades, bombs, mortar shelling and sniper fire.
"My neighborhood now is under the control of the Mahdi Army," Faisal said. He said Iraqi armored vehicles were in the main street but that "they cannot go deep into the neighborhood."
Police Lt. Col. Ali Sabri said the Mahdi army was surrounding a police training center in northern Basra but that "fierce fighting is taking place and police are defending the site."
Essam Abbas, a 31-year-old barber in western Basra, said "the Mahdi Army controls an Iraqi army base in the area because Iraqi troops fled the scene, leaving their vehicles and weapons."
He said supplies of food and drinking water were running short.
"Why did al-Maliki come to Basra and bring with him this tragedy?" Faisal said.
Hundreds of Shiites took to the streets in Sadr City and Karbala on Wednesday, demanding the government stop military operations in Basra and other cities and withdraw all security forces.
The deadliest clashes were in Basra, where at least 47 people were killed and 223 wounded in the two days of fighting, hospital officials said. The clashes in Baghdad left 39 dead and dozens wounded; 23 of those killed were in Sadr City.