Radical Shia cleric Moqtada Sadr has vowed to continue his fight against US forces in Iraq but says he will disband his militia if asked by Shia leaders.
Sadr's militia have a stronghold near Karbala's holiest shrine
"If the US wants to leave Iraq it will bring peace, but their presence will lead to more terrorism," he said.
It was Sadr's first press conference since his Mehdi Army rebelled in April.
Shia talks are continuing in Najaf to find ways to end to the Sadr uprising, as US forces battle his militia in several southern Iraqi cities.
Mr Sadr has offered a conditional truce to end a standoff with US troops in Najaf, but he was defiant over the situation in Karbala which has seen some of the fiercest fighting in the last two days.
"I appeal to the fighters in Karbala to stand together so as none of our holy sites and cities are defiled," Mr Sadr said in a press conference at Najaf's Imam Ali mosque, one of Shia Islam's holiest shrines.
He did not say whether two days of talks with Shia leaders were nearing a deal to end his uprising, but he praised the efforts while accusing the US of trying to sow discord.
"If the religious authorities issue an edict to disband the Mehdi Army we will disband it," he said. "If not, it will remain to defend this country and its sanctity."
Clashes in Karbala
Clashes in Karbala were concentrated near the Mukhayam mosque, close to the holy shrine for Imam Hussein, which the Mehdi Army uses as a base.
Witnesses quoted by Associated Press said American soldiers tried to enter the mosque, before coming under heavy gunfire from Sadr followers waiting in the buildings around it.
Gunfire continued until the middle of the day in Karbala, having started late on Tuesday.
"I could not leave the house because of the shooting," a Karbala resident told AFP by telephone from his home in the part of the city sealed off by coalition forces.
A correspondent for an Arabic TV network in Karbala said citizens told him is was "the most violent night in the history of the city".
Hundreds of people marched in Najaf on Tuesday calling on Mr Sadr to pull his militia out.
Some of his supporters fired in the air over the crowd after the majority of marchers had dispersed.
Sadr's militia launched an uprising against the US-led occupation in April after a pro-Sadr newspaper was closed down by the authorities.
The US appears to have softened its earlier pledge either to kill or capture the cleric, whom it accuses of killing another Shia leader in April 2003.