Iraqi police are reappearing on the streets of the Shia holy city Najaf for the first time in days, say reports.
Moqtada Sadr's militia are reported to be withdrawing from Najaf
Militia under radical cleric Moqtada Sadr, who had occupied government buildings and police stations, now appear to be withdrawing.
US forces have been seen grouping on the outskirts of the city in which Mr Sadr is still believed to be hiding.
The US briefly detained an aide of Mr Sadr. The arrest of another of his aides sparked the current Shia unrest.
Sheikh Hazem al-Aaraji was arrested by US forces at a meeting of tribal leaders in a Baghdad hotel.
Mr Sadr's forces seized control of government buildings and police stations in the southern cities of Najaf, Karbala and Kufa last week, after fierce clashes with coalition forces.
A local police chief in Najaf told the BBC that an agreement had been struck to allow police to re-enter the city.
"We have begun taking up our positions and tasks in police stations all over Najaf," he said.
The Iraqi Governing Council (IGC) and top Shia clerics are reported to have been involved in negotiations.
The withdrawal of Mr Sadr's Mehdi Army was a key demand of the US, says the BBC's Alex Last.
However, he reports that there seems to be confusion over the status of Mr Sadr, who is wanted in connection with the murder of a rival cleric.
Adnan Ali, one of those involved in the negotiations, said the US had agreed not to pursue Mr Sadr.
"It was agreed that Moqtada [Sadr] will have to dismantle [his] army... [and that] coalition forces will not try to arrest him or enter the city of Najaf," Mr Ali told the BBC.
But top US commander Lt Gen Ricardo Sanchez on Monday insisted that "the mission of US forces is to kill or capture Moqtada Sadr".
Supporters tried to prevent the detention of Sheikh Hazem al-Aaraji
The head of US Central Command, General John Abizaid, said the IGC intended to "bring Sadr to justice.
How they go about doing that, I think will probably end up being a uniquely Iraqi solution.
"But I believe that they're moving in that direction themselves. We're applying the military force necessary to assist in that regard, as you might imagine," he said.
US troops have been seen grouping on the outskirts of the city, where "we are prepared to conduct an offensive operation to eliminate the final elements of Moqtada al-Sadr's influence down there," according to Lt Gen Sanchez.
Supporters of Sheikh Hazem al-Aaraji jostled US soldiers as they detained the cleric, who is also a critic of American policy in Iraq.
Hours later, he was freed. US Brig Gen Mark Kimmitt said he was considered "to have no direct involvement in violent acts in Iraq and is not viewed as an imminent threat to security".
Mr Aaraji said: "I condemn this inhuman act", and other tribal leaders called the arrest an insult to Iraqis.
The recent revolt against the US-led occupation of Iraq erupted amid anger at the arrest of another of Mr Sadr's aides, Mustafa Yacoubi, on 3 April.