US and Iraqi forces are reportedly closing in on fighters loyal to Shia leader Muqtada al-Sadr besieged in the Imam Ali mosque in Najaf. Clashes between US-led forces and al-Mahdi Army militiamen raged just a few metres from the mosque complex for the first time, witnesses told Aljazeera on Wednesday. "US warplanes fired missiles that fell near the Imam Ali graveyard," said reporter Hussain al-Haidari, adding that the attack had apparently caused some damage to the mosque's foundation. Earlier, American tanks and troops advanced closer to the Imam Ali mosque after US aircraft opened fire overnight on militiamen who have defied the interim government by refusing to leave the shrine and end a bloody three-week confrontation. Gunfire rocked the area and smoke rose into the sky. US Army Lieutenant Michael Throckmortan, speaking not far from the mosque, said American and Iraqi forces were trying to isolate the fighters in one place before an attack. "What we are trying to do is shape the battlefield to create the big picture. We are trying to do everything that will give us the advantage," he said. **Iraqi troops*** About 500 Iraqi troops have been deployed around the mosque, the first time government forces have entered the battle zone in a conflict that has undermined Prime Minister Iyad Allawi's authority only two months after he took over from US-led occupiers. The troops came within 400 metres of the shrine on Tuesday and roads around it were sealed off. They advanced slightly closer on Wednesday. Asked what Iraqi forces would do, Throckmortan said: "We hope that they are the first ones to set foot inside [the shrine]." Iraqi Defence Minister Hazim al-Shaalan had warned al-Mahdi Army fighters that they would be wiped out if they did not leave the mosque by Tuesday evening. US and Iraqi officials have said only Iraqi forces will storm the mosque. **Militiamen remain*** Asked about reports some fighters had fled from the shrine, Throckmortan said: "I've seen no evidence they are leaving." Overnight, a US AC-130 warplane joined an attack on militia positions. The barrage left Najaf's old city shrouded in smoke that concealed the bright floodlighting of the shrine. Nearly 2000 US marines backed by aircraft and tanks have done most of the fighting, pounding rebels whose main weapons are AK-47 assault rifles, rocket-propelled grenades and mortars. **Keen on peace*** A spokesman for al-Sadr's office in Baghdad, Raid al-Kadhimy, told Aljazeera: "The whole world has witnessed al-Sadr welcoming any peaceful initiative. "But those crooked members of the government, who are collaborating with the US occupation forces, do not want any peace. They are slaves for the occupation forces. "However, we still welcome any peaceful initiative," he added. **Sistani returns*** Meanwhile, influential Shia cleric Ayatullah Ali al-Sistani has returned to Iraq from treatment in London and wants all Iraqis to march on the battle-scarred city of Najaf, a senior aide said on Wednesday. The aide, Hamid al-Khafaf, told Aljazeera al-Sistani arrived arrived in Basra and would lead a march on Najaf on Thursday. **PHOTO CAPTION*** A large cloud of smoke drifts over the Iraqi city of Najaf after a building caught fire during fighting, August 25, 2004. (Reuters)