Bearish and surly, Sheik Hamza al Taie wanted revenge. In a shoot-out the day before, Coalition troops had killed one of his comrades in arms and wounded several others. Now the Shiite-militia commander stood in a narrow Karbala street, sending his men into battle. He gestured, and two more cars, a Toyota pickup and a utility vehicle, pulled in front of him. He yelled, "Yalla mujahedin!" (Come on, holy warriors!), and a band of young men in sandals and red-checked kaffiyehs came running from a nearby building, waving AK-47s, grenades, pistols and machetes in the afternoon heat. As they climbed aboard, he carefully handed each one a container of orange juice as refreshment for the battle ahead. The vehicles sped off toward the center of town, and soon afterward a crackle of gunfire erupted in the distance, to Taie's evident satisfaction. "We will not accept anything but the liberation of our country from the occupiers," he told NEWSWEEK.

This was just the scenario the United States most wanted to avoid. Angry members of Iraq's Shiite majority, whipped into a frenzy by the baby-faced radical cleric Moqtada al-Sadr, were rising up by the thousands in armed revolt in Baghdad and in cities across the south. Sunni and Shiite militants demanding the immediate withdrawal of foreign forces had kidnapped civilians from a half-dozen countries. And in the Sunni heartland city of Fallujah, U.S. Marines were enmeshed in house-to-house fighting--the kind of urban warfare the Pentagon has dreaded all along. The Marines had killed several hundred Iraqis in the city, but last weekend they were reporting little success in the hunt for the men who had killed four American civilians and desecrated their corpses two weeks ago. Across Iraq, Coalition troops had suffered 49 deaths, 47 of them Americans, in one of the deadliest weeks since the invasion. Even America's friends there have begun speaking of "the Iraqi intifada."

To make things still scarier, the showdown began just before the Shiite festival of Arbayeen. Much of George W. Bush's Friday national-security briefing was spent examining the danger that there might be a repetition of the atrocities that marked the last big Shiite festival, Ashoura, when suicide bombers in Karbala and Baghdad killed some 200 worshipers. The threat didn't stop pilgrims from flocking to the shrine of Imam Hussein, the grandson of the Prophet Muhammad, in the holy city of Karbala. Processions of young men in bloodstained tunics marched to the steady thump of a large drum near the shrine's main gate last week, ritually flogging themselves with chains. Some of the marchers joined in a new chant: "Moqtada! Moqtada! We are your martyrs!"

American occupiers took hope from the fact that the al-Sadr rebellion had not erupted into a full-fledged Shiite revolt--at least not yet. In the five southern cities where serious trouble was reported, most agitators had been bused in from Sadr City, a sprawling Baghdad slum, and Coalition forces quickly moved to regain control. "We are winning every single fire fight," said the Coalition's deputy commander, Brig. Gen. Mark Kimmitt. The problem is, each skirmish adds to the Iraqi public's resentment of the occupying forces. At least four of the Governing Council's 25 Coalition-appointed members walked off their jobs in a protest against America's recent actions. Most of their anger was aimed at the crackdown in Fallujah, where local doctors said more than 400 civilians had been killed--a figure impossible to check, since journalists couldn't enter the sealed-off city independently. But the council members also blamed U.S. blunders for al-Sadr's metastasis from minor nuisance to outright menace.

American officials--particularly those who have long been pleading for a crackdown against al-Sadr--share that frustration. "We should have moved against Moqtada Sadr at least six months ago, massively, by stealth, all at once in a comprehensive plan to seize him and his top lieutenants and shut down his army and organization," says one senior Coalition Provisional Authority (CPA) source. "We've had one excuse after another and one delay after another from the military, which has been nervous about the possible public reaction." Al-Sadr's case typifies the dilemma that has plagued the occupation from the outset: the inherent conflict between maintaining order and winning hearts and minds. As tough as the alternatives can be, indecision can be fatal.

The Americans can't say al-Sadr blindsided them. A relatively unimportant but noisy junior cleric (he claims to be 31, but one Coalition specialist insists he's 25 and "just trying to pretend he's older"), he denounced the occupation almost from the first day, even as he took advantage of it. He's descended from a long line of martyred religious leaders, and their reputation among Shiites endowed him early on with oversize dreams of glory. His father, Grand Ayatollah Muhammad Sadiq al-Sadr, was murdered in 1999 after speaking out against Saddam Hussein. With the ouster of the Iraqi despot last spring, the son established a base in Saddam City--promptly renamed Sadr City--and began recruiting his own militia, the Mahdi Army. Unlike the reclusive senior clerics of Najaf, al-Sadr actively courted the media, handing out press releases and taking special care of journalists at the anti-American demonstrations he called with increasing frequency.

Al-Sadr's ruthlessness was never in doubt. When the moderate Shiite leader Abdel Majid al-Khoei returned from exile in London last spring, posing a challenge to al-Sadr's ambitions, he didn't survive long. On April 10, 2003, a mob attacked and killed al-Khoei at the Imam Ali shrine, right next door to al-Sadr's headquarters in the holy city of Najaf. Although al-Sadr has always denied any wrongdoing, evidence soon surfaced suggesting that he had a role in the murder (NEWSWEEK, May 19, 2003). A young judge in Najaf launched an investigation of the killing after witnesses volunteered statements. According to the judge, al-Sadr's followers asked their leader what to do with al-Khoei and were told, "Take him away and kill him in your special way."

The judge signed a warrant for al-Sadr's arrest in August. Yet the Americans kept it sealed, as top U.S. policymakers and military officers feuded about how best to handle the renegade cleric. From the outset American officials had tried to cultivate him. He had a great pedigree and unmatched influence among the Shiite underclass. Yet everyone knew that al-Sadr was dangerous. Plans were hatched at least twice to arrest him, only to be canceled at the last minute. "Those who pulled the plug were certainly correct that taking al-Sadr off the board would have raised one mighty ruckus in Sadr City," says a former top adviser to CPA chief Paul Bremer. "What they did not sufficiently take into account was that his removal... would have been received with a sigh of relief by leaders of the Shiite establishment." Instead, the Americans kept negotiating with the cleric in secret.

Meanwhile al-Sadr was riding high. Last June he got feted like an ayatollah when he visited Iran with a top aide, Sheik Mustafa Yacoubi, and two other junior clerics. The four traveled by road from Najaf to the Iranian city of Ilam, where Iranian authorities had a 10-seat private plane waiting for them. It was the first time any of them had been abroad, and they reveled in the adventure of it. "None of us had flown before," Yacoubi told NEWSWEEK last November. "Sayyid Moqtada told us we may experience some drowsiness when the plane leaves the ground. He asked us to relax and stay calm." In Tehran, the group was put up in a comfortable midtown apartment, and got audiences with Supreme Leader Ayatollah Ali Khamenei, former president Ali Akbar Hashemi Rafsanjani and judiciary head Ayatollah Mahmoud Hashemi Shahroudi. (At Friday prayers last week, Rafsanjani praised the "enthusiastic, heroic young people" of al-Sadr's Mahdi Army.)

Sources in Najaf say the Iraqi grand ayatollahs were furious about al-Sadr's Iran visit. "The marjas [the holy city's highest leaders] found it offensive that Moqtada would be officially invited to Iran," says Sheik Ali al-Rubai, spokesman for one of the holy city's four top clerics, Grand Ayatollah Ishaq Fayadh. "When Khamenei's representative came to Najaf [in August], the marjas spoke to him in a rough way and demanded to know why they invited Moqtada." The lavish reception was a particular slap to Ayatollah Mohamad Baqir al Hakim, a major beneficiary of Iranian support for two decades. Hakim threatened to cut ties with Tehran in protest. A short time later terrorists killed Hakim and 89 bystanders with a massive car bomb outside the Imam Ali mosque, an attack that may have been carried out by Baathists but remains unsolved.

Al-Sadr's dreams continued to grow. At Friday prayers on Oct. 10 he announced that he was forming an Iraqi government of his own. No one paid much attention; he had neither the money nor the prestige to do any such thing. Three nights later his supporters fanned out across Karbala, seizing the post office and the television station before marching on one of the city's two grand holy sites, the Abbas shrine. Al-Sadr's "government" could have used the thousands of dollars that devout pilgrims contribute there every day. But the raiders were stopped by local supporters of Najaf's highest cleric, Grand Ayatollah Ali Sistani. U.S. sources say 36 buses carrying 1,000 al-Sadr reinforcements were heading toward Karbala when American troops intercepted and turned back the convoy.

Still the Americans did nothing to get al-Sadr off the streets. One White House official says there was always a misplaced hope that Iraqi security forces would eventually be up to the job. When the Americans finally did make a move two weeks ago, they did so tentatively, shutting down al-Sadr's newspaper and detaining a few followers. They finally arrested al-Sadr's top lieutenant, Sheik Yacoubi, and 11 other followers on charges connected with al-Khoei's murder last April. But no move was made against al-Sadr himself. Days before the latest revolt erupted, Bremer's aides urged him to get the cleric off the streets without delay. Bremer said he wanted to, but was waiting for a good plan from the military.

Why did the United States act at all against al-Sadr if it couldn't do so more decisively? "If you're going to put a stick in someone's eye, you have to drive it all the way in," says one former CPA official. Ali Shukri, a former Jordanian intelligence chief, says U.S. officials continue to underestimate the young cleric's influence. "A lot of people look at Moqtada and they think that he's young and doesn't have power," says the retired spymaster. "They ignore the fact that Moqtada has the power of his ancestors behind him, all those martyrs."

Last weekend al-Sadr was safely holed up in Najaf, barely 300 yards from Ayatollah Sistani's home. The Americans would hardly dare to risk an attack there, at least during the emotional Arbayeen pilgrimages. And once again Bremer seemed to be temporizing--sending in Shiite members of the GC to negotiate. Still, a spooky "High Noon" atmosphere hung over the whole town. The alley leading to Sistani's house was blocked by metal bars and closed to pedestrian traffic. Armed guards sat at the alley's entrance. The houses of the other three grand ayatollahs were similarly protected. No one was around to ensure law and order--unless you counted bands of holy warriors. And U.S. authorities were left pondering why they didn't crush a monster when they had the chance--and how to do deal with him now.