Shia cleric Moqtada al-Sadr is unhurt and is negotiating with the Iraqi government to leave the Hazrat Ali shrine in the city of Najaf, Interior Minister Falah al-Naqib said on Friday.
Several spokesmen to Sadr said he was wounded in a US raid on Friday.
"Sayyed Moqtada will not be touched if he leaves the shrine peacefully. A truce has been in force since last night," Naqib told Reuters. "We will go after the criminal elements which have penetrated the Sadr movement, but not Moqtada," he added.
The government has been under pressure to stop the US attack on Najaf as casualty's mount and more Iraqis express outrage at the US tactics used to confront the anti-establishment cleric and his followers.
An Iraqi political source said a delegation of tribal leaders and political parties met Prime Minister Iyad Allawi on Thursday and demanded he try to put an end to the US offensive on Najaf.
Moqtada Sadr has laid down a list of conditions for an end to more than a week of deadly clashes pitting his militia against US troops and Iraqi forces, a spokesman said on Friday.
Sheikh Ali Sumeisim spelled out the conditions - notably for the withdrawal of the US-led forces and handover of Najaf to the Marjayia, the Shia authority - during a news conference at a hotel in the besieged holy city of Najaf.
If all multinational forces, Iraqi police and soldiers leave Najaf and the Marjayia agrees to take responsibility for the city, "the Mehdi Army would pull out from Najaf", Sumeisim said, while stressing they refused to disarm.
All basic services must be restored in Najaf, and Sadr's Mehdi Army recognised as an ideological movement with its members allowed carrying weapons for self-defence, Sumeisim continued.
Those jailed for supporting the resistance, all imprisoned clerics and women must also be released from prison, the spokesman added.
Resistance fighters must no longer be persecuted and Sadr's organisation should be allowed to decide for itself whether it becomes a political movement, under the conditions.
"All followers of Sadr's movement should be under a legitimate constitution written by a free, elected government," Sumeisim said.
"Lastly, all efforts should be aimed at building a free, independent, unified Iraq," he added.
A Mehdi Army leader described Sadr's health as satisfactory after he was lightly wounded early Friday while inspecting his fighters.
Meanwhile, seven Iraqis were killed and 34 wounded as US forces attacked suspected Shia militia positions in the southern city of Kut, a hospital official said, as the governor warned of air strikes if fresh violence broke out.
A woman was among six people killed and 20 wounded when US shells hit the Izzat district on the Tigris River, chief of Kut's general hospital said.
"The Americans also hit an Iraqi National Guard post by mistake in the Al-Haidariya neighbourhood, killing one guardsman and wounding 14 others at around 2:00 am (2200 GMT)," he added.
Later Friday, the governor of Kut, Mohammed Ridha al-Jashami, warned of renewed air strikes by the US-led multinational forces in case fresh violence broke out or if curfew orders were disobeyed.
The governor, who holds a legal authority in the region, has the right to ask the command of multinational forces in Iraq for support from US forces to take action.
Kut fell briefly to Sadr loyalists during an earlier uprising by the militia against the US-led occupation of Iraq in the spring.
A kidnapped British journalist was released in Iraq less than 24 hours after he was abducted at gunpoint from a hotel, after aides of radical Shia cleric Moqtada Sadr apparently came to his rescue.
Freelance Sunday Telegraph reporter James Brandon, 23, was paraded at Sadr's offices in Basra, where representatives of the militia leader said he had been freed, before they escorted him to Iraqi police.
Wearing a pink shirt and dark trousers, a timid and bruised Brandon held an impromptu press conference. He told reporters he was treated harshly at first but that changed, he believed, because his captors heard the appeal from Sadr's office.
Masked men snatched Brandon, bleeding from his hotel room late Thursday, and had reportedly demanded that US forces withdraw from the holy city of Najaf, where Sadr's private Mehdi Army has been locked in heavy fighting for days.
A top aide to the cleric said earlier, he had lodged a "formal" request for Brandon's immediate release.
In Baghdad, Sadr spokesman Sayed Hazem al-Araji told AFP it was "unlikely" the kidnappers were from the Mehdi Army.