The government welcomed the move, which followed intense negotiations by Shiite officials, including two lawmakers who reportedly traveled to Iran to ask religious authorities there to intervene.
Prime Minister Nouri al-Maliki, whose Tuesday offensive in the oil-rich southern city in Basra sparked the crisis, called al-Sadr's statement "a step in the right direction."
But fighting continued in the Basra area after the announcement. Seven people also were killed when a mortar struck a residential district in Baghdad's Karradah district, and witnesses reported clashes in the Shula area in a northern section of the capital.
A U.S. soldier also was killed Sunday in a roadside bombing north of Baghdad, the military said, raising to at least 4,008 American service members who have died since the Iraq war started in March 2003, according to an Associated Press count.
The nine-point statement by the anti-American cleric - which was broadcast through Shiite mosques in Baghdad and across the south - called for an end to the "armed presence" in Basra and other cities and urged followers "to cooperate with the government to achieve security."
Al-Sadr, however, also demanded that the Iraqi government stop "illegal and haphazard raids" and release security detainees who haven't been charged, two issues cited by his movement as reasons for fighting the government.
The Sadrists have complained that the government has released few of their followers under a new amnesty law, which they complain has favored Sunnis who have recently joined with the Americans to fight al Qaeda.
The cleric's decision offered way out of a widening Shiite conflict at a time when government forces appeared to be making little headway against the well-armed militias in Basra.
Al-Sadr's order stopped short of calling on his fighters to disarm. And the government insisted it would still target "outlaws."
Iraqi authorities in Baghdad said a citywide curfew would be lifted Monday morning, although a vehicle ban remained on three strongholds of al-Sadr's Mahdi Army militia in the capital.
Before al-Sadr's statement, dozens of Shiite gunmen Sunday stormed a government TV facility in central Basra, forcing Iraqi troops guarding the building to flee and setting armored vehicles on fire.
London's Daily Telegraph reports that some members of al-Sadr's militant army are driving American-issued Humvees, given to them by sympathizers within the Iraqi Army. Some Iraqi service members are even defecting to al-Sadr's forces.
One of al-Maliki's top security officials also was killed in a mortar attack in Basra, officials said. The prime minister's Dawa party issued a statement of condolences identifying the slain official as Salim Qassim, known by his nickname Abu Laith al-Kadhimi.
In an effort to curb the growing violence, two senior Shiite lawmakers close to al-Maliki - Hadi al-Amri and Ali al-Adeeb - traveled to Iran and asked authorities there to stop the flow of weapons to al-Sadr's Mahdi Army, according to two officials.
The lawmakers - both of whom have close ties to Iran - also asked the Iranians to pressure al-Sadr to come up with a face-saving initiative, according to the officials, who spoke on condition of anonymity because of the sensitivity of the subject.
Iran is believed to supply weapons, money and training to all major Shiite factions in Iraq, including the Mahdi Army as well as groups closely allied with the Americans.
Scattered firing could be heard in central Baghdad hours after al-Sadr's statement was released, and rockets or mortars were fired toward the Green Zone, where U.S. diplomats were holed up in the embassy at Saddam Hussein's former palace and ordered to stay under hard cover as the sprawling area has come under frequent fire this week.
At least seven Iraqis were killed and 21 wounded when two rounds apparently fell short, striking houses in the commercial district of Karradah, police said.
Suspected Mahdi Army gunmen also attacked an Iraqi checkpoint in eastern Baghdad, killing six troops, police said. The attack came hours after al-Sadr's statement was issued by his office in the holy city of Najaf.
The strength of the resistance to the week-old offensive has taken the U.S.-backed government by surprise, forcing it to bring in reinforcements as the number of Iraqi security forces involved in the effort topped 30,000.
The prime minister, himself a Shiite, has called the fight "a decisive and final battle," although he acknowledged later that he may have miscalculated by failing to foresee the strong backlash the offensive would provoke.
An estimated 400 people have been killed as fighting spread to Baghdad neighborhoods and other southern cities.
Several clashes have involved U.S. forces and the U.S. military launched air strikes in Basra and American special forces were on the ground helping the Iraqi ground troops. The military said 16 enemy fighters were killed when an AC-130 gunship strafed heavily armed militants attacking Iraqi troops during clashes on Saturday.
The Shiite violence threatened to jeopardize recent security gains due to an influx of American troops, a Sunni revolt against al Qaeda in Iraq and al-Sadr's cease-fire that was announced in August.
Attacks bearing the hallmark of al Qaeda militants also continued in northern Iraq.
A suicide car bomber killed five U.S.-backed Sunni fighters and wounded eight other people near the oil hub of Beiji, 155 miles north of Baghdad.
Gunmen also killed five policemen in Duluiyah, a Sunni-dominated area 45 miles north of Baghdad.
The U.S. military said separately that American and Iraqi troops unearthed 14 badly decomposed bodies in a mass grave on Saturday in Muqdadiyah, northeast of Baghdad. It was the second such find since Thursday, when 37 bodies were found.