Smoke from burning cars rise after clashes broke out in the streets of Shiite holy city of Karbala, south of Baghdad, Iraq, 28 Aug 2007

Prime Minister Nouri al-Maliki visited Karbala and blamed "armed criminal gangs and remnants of the former Saddam regime" for the violence.

But, security officials in Karbala said the fighting Tuesday broke out when gunmen loyal to radical cleric Moqtada al-Sadr fired on guards around two major shrines protected by the armed wing of the rival Supreme Iraqi Islamic Council.

A spokesman for Moqtada al-Sadr's Mahdi Army denied the group's involvement in the violence in Karbala and announced the suspension of all operations, including attacks against U.S. and other coalition forces, for six months to reorganize.

The violence forced authorities to impose an indefinite curfew on Karbala and order Shi'ite pilgrims to leave the city, cutting short a religious festival they were attending.

Joost Hilterman, the Middle East project director for the International Crisis Group, says this fight was a long time in the making. He described the violence in Karbala as part of a civil war within a civil war and said it did not bode well for the future of Iraq.

"Altogether with the other conflicts, the sectarian one, the inter-Sunni one which exists, possibly a Kurdish-Arab one, what we are seeing in Iraq is the evolution of a failed state," said Hilterman.

Meanwhile, the U.N. refugee agency said an increasing number of Iraqis are fleeing the violence. The agency said more than 60,000 Iraqis are becoming displaced each month - up from 50,000 a month earlier. The UNHCR says many Iraqis are fleeing because they can not get access to social services or they fear being forced out of ethnically-mixed areas.

The United States says it will take 2,000 Iraqi refugees during the next few weeks and contribute $30 million to U.N. programs for educating Iraqi refugee children in Syria, Jordan, Lebanon, and Egypt.

U.N. refugee agency spokeswoman in Jordan, Rana Sweis, called the education grant a good start.

"This is really a beginning and we encourage other donors to participate and confirm their concrete support to this endeavor," said Sweis.

An estimated two million Iraqis have fled the violence in their country, mostly to neighboring Syria, which may host as many as 1.4 million refugees. An additional two million have been displaced in Iraq.