Baghdad authorities on Monday lifted a three-day curfew imposed on the city after the worst bombing since the US invasion in 2003, but nerves were frayed on fears of a new wave of blood-letting.
Iraqi President Jalal Talabani was due to fly to Iran for talks amid growing calls in Washington to engage Iran and Syria to help stop Iraq sliding into civil war. Washington accuses Syria and Iran of fuelling the violence.
The New York Times said a draft report to be debated by the Iraq Study Group, co-chaired by former secretary of state James Baker and which is preparing eagerly awaited proposals on a new direction in Iraq, would urge an aggressive regional diplomatic initiative to include direct talks with Iran and Syria.
The group's recommendations will be sent to the White House, which is considering a change in strategy in Iraq to allow it to start pulling out some of its 140,000 troops.
Britain, America's main ally in Iraq, said on Monday it hoped to withdraw thousands of troops by December 2007, while Italian Prime Minister Romano Prodi said the last Italian troops would leave next month. King Abdullah of Jordan, who will host a summit in Amman between Prime Minister Nuri al-Maliki and President George W. Bush this week, said "something dramatic" must come out of the summit because Iraq was "beginning to spiral out of control".
As Baghdad's curfew was lifted, people rushed to stock up on food as rumours swirled that the capital was about to be locked down again. Maliki's office denied any such plans.
Thursday's multiple bombing in the Shia militia stronghold of Sadr City killed 202 people and drew comparisons to the February bombing of a Shia shrine in Samarra in its potential to fuel sectarian hatred and reprisal attacks.