The confrontation between the US forces and militiamen loyal to radical Shia cleric Moqtada al-Sadr shifted to Baghdad on Sunday.
Despite a peace accord in the holy city of Najaf last week, Baghdad's Sadr City neighbourhood, home to up to 2m Iraqis, saw fierce clashes between US troops and Mr Sadr's forces over the weekend, according to residents.
It remains effectively out of US and Iraqi interim government control.
Sunday's talks, which sought to organise a permanent ceasefire in the area akin to that in Najaf, were suspended without agreement.
The Sadr City meeting came amid fears on the part of Mr Allawi's government and the US military that Mr Sadr's fighters who have left Najaf will take up arms in their home towns.
The terms of the Sadr City negotiations were not disclosed on Sunday but it is likely that local Iraqi leaders were demanding the withdrawal of US forces from the area whom they accuse of acting in a provocative way.
For their part the Iraqi government and theUS military want to seeMr Sadr's Jaysh al-Mahdi militia formally disbanded a notable omission from the Najaf agreement.
Mr Allawi was in combative form when he spoke to local television on Saturday following the Najaf agreement. The three-week confrontation with Mr Sadr had become a crucial test of his personal authority.
The government will not permit private armed groups to operate outside Najaf. We will confront this with force, Mr Allawi said.
Najaf itself was quiet on Sunday. Iraqi police were in control of the old city, the scene of three weeks of some of the heaviest fighting since the end of the US-led invasion last year. But the peace deal brokered by Grand Ayatollah Ali al-Sistani, the most influential cleric in Iraq, was looking more like a shaky truce than a conclusive settlement.
On Saturday, Iraq's national police force was the only armed presence in the immediate precincts of the shrine of Imam Ali, the holiest site in global Shia Islam.
US military humvees and Bradley fighting vehicles were still patrolling the long straight boulevards cut by former ruler Saddam Hussein through the city's ancient cemetery after the 1991 Shia uprising. Under the terms of the agreement negotiated by Mr Sistani, US forces are supposed to withdraw from Najaf and the nearby town of Kufa.
A team of five Iraqi ministers visited Najaf on Saturday and pledged to start reconstruction work quickly. The visit was part of a concerted effort to address some of the underlying social problems, notably unemployment, that contribute to anti-government and anti-US sentiment.
Labourers were hosing blood from the broad forecourt of the Imam Ali shrine, and a few bewildered men searched for names in the casualty book outside the office used by Mr Sadr's militia. There was almost no movement in the shattered old city, except for some fast new police cars kicking up dust on the empty streets.
■ Insurgents fired rocket-propelled grenades from a mosque at US troops in northern Iraq on Sunday in clashes that killed two attackers and wounded more than 30 civilians, the US military said, Reuters reports from Baghdad.
Meanwhile, attacks were taking a toll on the country's oil industry, with exports running lower than normal Sunday.
Loadings at offshore Gulf platforms were running at 1.2m-1.4m barrels per day compared with 1.5m b/d on Saturday and 2m b/d a week ago, a shipping agent said.