US Marines handed control in Falluja to a former general in Saddam Hussein's Republican Guard on Friday but new violence showed that a month of fighting in the besieged city was not over.
In a reversal of Washington's previous policy of excluding senior members of Saddam's Baathist regime from power, Jasim Mohamed Saleh said his new force would help police bring order and relieve a month-long siege that has cost hundreds of lives.
"We have now begun forming a new emergency military force," he told Reuters, saying people in Falluja "rejected" US troops.
But Marine commanders insisted that their men, who pulled back from many positions during the day but fought guerrillas in others, would keep overall responsibility in the city and continue operations against suspected foreign Islamic militants.
They described Saleh's force of 1,000 or so former soldiers as an Iraqi battalion under US control.
"Any suggestions we're handing over responsibility or withdrawing is patently false," Brigadier General Mark Kimmitt told Sky News on Friday.
Kimmitt said the United States had received an offer from former members of Saddam Hussein's military to help restore order in Falluja.
He said they would work alongside American forces and remain "under Marine chain of command".
But Saleh, cheered by crowds waving the Saddam-era Iraqi flag as he drove through his hometown in his old uniform, said local people wanted Falluja to be run by Iraqi forces only.
US officials have struggled to stamp out open insurrection in Falluja while avoiding more bloodshed that has cost more American lives in April than any other month in Iraq and turned many Iraqis against them. They have begun to recruit some former Baath party members to help restore order and basic services.
US OFFICIALS CAUTIOUS: President George W. Bush, watching sliding poll numbers ahead of November's presidential election, gave commanders a free hand in Falluja this week and the Pentagon sent more tanks.
But the improvised peace deal appeared to have averted an all-out assault on the city of 300,000 - for the time being.
"We should be very careful in thinking that this effort to build this Iraqi capacity will necessarily calm down the situation in Falluja tonight or over the next several days," said General John Abizaid, the US Middle East commander.
Minutes later, explosions shook the eastern outskirts and a senior military spokesman said two Marines were killed by a car bomb near their base outside Falluja on Friday.
Marine commanders issued a statement saying: "The coalition objectives remain unchanged - to eliminate armed groups, collect and positively control all heavy weapons and turn over foreign fighters and disarm anti-Iraqi insurgents."
The siege, mounted after four American security guards were murdered a month ago, has killed 600 people, according to local doctors, and has become a source of grievance for many Iraqis, especially the once-dominant Sunni minority in Saddam's heartlands of the "Sunni triangle" west and north of Baghdad.
Winning over Iraqi opinion is important for Washington as it prepares to hand over formal sovereignty to an interim government in Baghdad on June 30 while leaving more than 100,000 US troops in a country where many are clearly still hostile.
Washington suffered a public relations blow in that regard on Friday when Arab television channels broadcast pictures, first aired in the United States, seeming to show US soldiers abusing Iraqi prisoners in Saddam's notorious Abu Ghraib prison.
Since Bush declared an end to "major combat operations" a year ago on Saturday, 428 US service personnel have been killed in action in Iraq, 127 of them in April alone. Fewer than 100 died in the three weeks it took to topple Saddam.
EX-GUERRILLAS 'WELCOME' It was unclear what influence the new Iraqi force in Falluja has over the estimated 2,000 or so guerrillas, some of whom US officials say are diehard Saddam supporters. Some 200 foreign Islamic militants have also been active, US officials say.
One Marine officer said that if those Iraqis who had been fighting in Falluja joined Saleh's force that would not be a problem for the US troops: "It's not a bad thing because they're not on the wrong side," he told Reuters.
Some in the ranks were not happy to be leaving the battlefield and said they were ready to fight again if needed.
"It's a mistake. People have lost lives in Falluja and now they die for nothing. But we have to give the Iraqis the chance to prove they can do it by themselves and we can still go back if it doesn't work," said Corporal Clint Burfort from Iowa.
A relative of Saleh said he had been chief-of-staff of a brigade of the elite Republican Guard before transferring to a regular infantry division. Senior officers were expected to be members of Saddam's Baath party. The US occupying authority disbanded the 375,000-strong armed forces after last year's war.
People who had fled homes in Falluja lined up at military checkpoints to return but troops let few pass into the town.
Iraqis who suffered oppression by Saddam's armed forces had mixed feelings about the move in Falluja.
Mahmoud Othman, a Kurd on the US-appointed Governing Council, said it was worthwhile to end fighting. But he added: "It's not a good precedent...As usual, the Americans, without consulting anyone at all, have gone ahead with a policy to replace an earlier, failed policy...I'm not crazy about coming back to make a deal with someone from the Republican Guard."
Around the southern holy city of Najaf, US forces are tightening a squeeze on the Mehdi Army militia loyal to rebel cleric Moqtada al-Sadr, who has taken refuge among shrines sacred to Iraq's long oppressed Shia majority.