In what appeared to be a reversal of Washington's policy of excluding members of Saddam's Baathist regime from power, Jasim Mohamed Saleh told Reuters his force would help police and other Iraqi security forces bring order to the town.

The commander of the Marines, who were pulling back from siege positions around the city of 300,000, was quoted as saying the former commanding general of Saddam's 38th Infantry Division would lead a force of about 900 mostly former Iraqi soldiers to replace the US forces.

"We have now begun forming a new emergency military force to help the forces of the Iraqi Civil Defence Corps and the Iraqi police in completing the mission of imposing security and stability in Falluja without the need for the American army, which the people of Falluja reject," Saleh said.

Falluja's police chief confirmed the deal to Reuters.

Hundreds of people cheered the former general, who lives in the city, as he made his way into the town centre in uniform in the early afternoon.

A relative said he had been chief-of-staff of a brigade of Saddam's Republican Guard, an elite force that put up the main resistance to US invading forces a year ago. Senior officers were all expected to be members of the ruling Baath party.

The top Marine Corps officer in Iraq, Lieutenant General James Conway told the New York Times the new unit would be called the 1st Battalion of the Falluja Brigade.

Guerrilla Fighters

Marines pulled back from positions along the southern and western edges of the city. But they appeared to hold on to strongpoints dominating the Golan district to the north, where they have fought fierce gunbattles and called in bombers on Thursday evening against Sunni Muslim insurgents.

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 in a city once fiercely loyal to his minority Sunni-dominated regime.

Some 200 foreign Islamic militants have also been active, US commanders and Iraqi officials in Baghdad say.

US Deputy Defense Secretary Paul Wolfowitz spoke of trying to "isolate the killers from the population."

Further details of the accord remained elusive. US demands that Marines launch joint patrols with Iraqi police inside town appeared to have been dropped. There was no word on a call to local people to hand over the killers of four US contractors whose bodies were publicly mutilated, prompting the US siege.

People who had fled homes in Falluja lined up at military checkpoints to return to the town, clearly hopeful that a peaceful resolution might now be in sight.

President George W Bush gave his troops a free hand this week to retake control of the city, a symbol of insurgency among Iraq's Sunni Muslim minority against the American occupation, and the Pentagon has sent dozens more heavy tanks to the area.

A US defence official said efforts to win over hearts and minds before handing over formal sovereignty to an interim Iraqi government on June 30 had to be balanced with a need to show that resistance to US occupation would not be tolerated.

"The Iraqis do respect strength. In their mind, a lot of that strength comes from combat power presence," he said.

However, appealing to Iraqi pubic opinion is vital for US officials trying to restore some stability. The troops are likely to be in Iraq for a considerable time to come.

The June 30 deadline for ceding power to an interim Iraqi government would mark only the beginning of the transfer of sovereignty, Vice President Dick Cheney said on Thursday.

"This will be a difficult time, over the next two months, getting to June 30, because the enemy is well aware that their circumstances will become more difficult as soon as we begin to transfer authority back to the people of Iraq," he added.

Efforts to calm Iraqi irritation with the occupation were not helped by the wide dissemination of humiliating photographs, first broadcast in the United States, which appear to show US soldiers abusing detainees at Saddam's long notorious Abu Ghraib prison outside Baghdad.

Arab television channels broadcast the pictures yesterday.

The military said it might discipline the general in charge. Six soldiers have already been charged over the incidents.

In Falluja, doctors say about 600 Iraqis have been killed.

April has also been the bloodiest month for American forces in 13 months in Iraq. Ten deaths on Thursday meant nearly a quarter of the 534 US combat deaths have occurred this month.

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 Shi'ite Muslim majority.