BASRA, Iraq (Reuters) - Iraqi forces fought Shi'ite militants on Wednesday in battles that threatened to wreck a truce by a powerful cleric that U.S. forces had credited for much of the reduction in violence of the past year.

More than 60 people have been killed and hundreds wounded in the fighting, centered on the oil hub of Basra in the south and on Shi'ite neighborhoods of Baghdad where armed followers of cleric Moqtada al-Sadr hold sway.

Prime Minister Nuri al-Maliki, in Basra overseeing the campaign, said fighters would be spared if they surrendered within 72 hours. Sadr's followers rejected the ultimatum.

The assault was the largest military campaign carried out yet by Maliki's forces without U.S. or British combat units, posing a crucial test for the Iraqi government's ability to impose its will and allow American forces to withdraw.

"These are Iraqi decisions, they are Iraqi government forces and these are Iraqi leaders implementing and directing these decisions," U.S. military spokesman Major-General Kevin Bergner said in Baghdad. He said U.S. and British backing was limited to small mentoring teams and some air support.

"A year ago the Iraqi security forces would have struggled to move this force, they would not have been able to support it and it would have been difficult for the government then to take this strong action," he told a news conference.

Washington aims to bring 20,000 of its 160,000 troops home by July after a build-up of troops reduced violence dramatically last year. But violence has increased in the past few months.

Maliki's government is under pressure to show it can maintain security on its own. U.S. Democratic candidates who hope to succeed President George W. Bush next January are calling for a speedy withdrawal from an unpopular war.

Sadr, a young, anti-American cleric, helped install Maliki in power after an election in 2005 but later broke with him. His followers, known as the Mehdi Army, have feuded with other Shi'ite groups, especially the Supreme Islamic Iraqi Council, a powerful force in Maliki's government and in the police.

The fighting threatens a ceasefire which Sadr declared last August, winning praise at the time from U.S. commanders for helping to reduce violence.

Sadr's followers have taken to the streets demonstrating against Maliki's government and forcing schools, universities and shops to close. On Tuesday he said he would call a "civil revolt" if attacks against his followers did not stop.

The truce was still in effect, senior Sadr aide Luwaa Sumaisem told Reuters in the Shi'ite holy city of Najaf.

The head of Sadr's office in Basra, Harith al-Ithari, said the movement was negotiating with Maliki to end the fighting.

"There are ongoing negotiations with the prime minister. Maliki asked to meet Sadr officials in Basra," he told Reuters. "Things are moving in the direction of solving the crisis."

BASRA FIGHTING

The worst fighting has been in Basra, where a health official said 40 people had been killed and 200 wounded.

Heavy gunbattles restarted early Wednesday in five districts of Basra after a brief lull. Mortars or rocket attacks regularly struck Iraqi security checkpoints and bases.

Ground commander Major-General Ali Zaidan told Reuters his forces had killed more than 30 militants on the first day of the operation, which began before dawn on Tuesday. More than 25 were wounded and around 50 were captured, he said.

"The operation is still going on and will not stop until it achieves its objectives," he said.

A British military spokesman said the assault was expected to last two to three more days. British forces, which patrolled Basra for nearly five years, have withdrawn to a base outside the city since December and were not involved in the fighting.

An official with Iraq's Southern Oil Company said production in the Basra area could be disrupted if the fighting continues for more than three days, preventing employees from reaching work. The area produces 80 percent of Iraq's oil exports.

In the capital, a health official said 14 people were killed and more than 140 wounded in clashes in Sadr City, the Shi'ite slum named for the cleric's slain father, where the younger Sadr and his Mehdi Army militia have widespread influence.

Bergner said rogue Mehdi Army units linked to Iran were responsible for days of constant mortar strikes on the Green Zone diplomatic and government compound and other Baghdad areas.

One mortar bomb on the Green Zone seriously hurt three U.S. civilians. Mortar attacks killed five people and wounded 21 in the Karrada neighborhood and killed four in Risala.

Elsewhere in the south, Sadr fighters seized control of seven districts in the town of Kut. A Reuters witness heard clashes near a government building. Residential buildings and cars were on fire and mortar explosions could be heard.