Almost 100 people were wounded as hundreds of armed fighters from Moqtada al-Sadr's Mahdi Army destroyed police stations and clashed with officers, while Sadr sent senior aides to negotiate a truce.
"My brothers in Amara, the dear city, I ask all to abide by patience and not to be misled by the schemes of the occupier who is seeking to divide the brothers in order to incite sedition," Sadr said in a statement.
Gunfire was still audible in the city as night fell on Friday, but the violence appeared to be tailing off.
A spokesman for the British military, which has security responsibility in southern Iraq, denied reports that the town had fallen to the Mahdi Army, but said the situation remained very tense.
"We're looking at 200 to 300 gunmen that are operating as a rogue element of the militias in that town. It's very difficult to take control of a town of that size with a group of 300 gunmen," Major Charlie Burbridge said.
Amara is a provincial capital and home to an estimated 350,000 people.
"The focus of the aggression was on two police stations with a third, a police headquarters, being a secondary target as well. So it's very localised," Burbridge said.
"The Iraqi police service are in Amara. The Iraqi Army are reinforcing their positions just south of Amara and have sent up approximately 700 troops to support the Iraqi police," he added.
A British battle group of 600 troops backed by attack jets and armoured vehicles is standing by to intervene if Iraqi forces need support, he said.
However, Burbridge added: "We're waiting for an Iraqi political solution and we're confident we'll get one."
Prime Minister Nuri al-Maliki dispatched a delegation headed by the state minister for security affairs, Shirwan al-Waeli, to resolve the crisis.
Fighting erupted in Amara after police arrested a Mahdi Army militiaman suspected of killing a local intelligence officer.
"There are 18 dead, some of them gunmen, and 97 wounded, including militia, police and civilians," said Zamil al-Oreibi, medical director of the city's health department, updating an earlier casualty report.
On Wednesday, the chief of Amara's police intelligence service was killed along with three colleagues by a roadside bomb. The next day a Mahdi Army leader was arrested, provoking a reprisal attack by his supporters.
The fighting in Amara will once more call into question the success of London and Washington's policy of handing over areas of Iraq to local security forces, which has failed to stem sectarian killings in Baghdad.
"We're still studying the situation and trying to figure out exactly what's going on there," White House spokesman Tony Snow said.
British troops patrolled Amara until August, when they pulled out of a base on the outskirts of the city that was coming under regular mortar attack and handed over security duties to Iraqi forces.
Following the withdrawal the British base was looted and the Mahdi Army a loosely-organised militia force nominally loyal to Sadr, the leader of a group declared victory over the "occupier".
Elsewhere in Iraq, mortar fire rained down on a strife-torn town north of Balad and sectarian death squads hunted civilians in the killing fields near the restive town of Baquba, north of the capital.
The overnight mortar fire killed nine people and wounded 12 in the town of Balad, police said.
Three civilians were killed and three others wounded when gunmen launched an attack on the Shiite market town of Khalis near Baquba which has also seen a spike in sectarian killings.
The night before, 10 civilians were killed when Khalis's market was bombed.
And in Baghdad, an overnight mortar attack killed five Palestinian refugees and wounded 11 more living in a fortified compound in east Baghdad.

Copyright AFP (Agence France-Presse), 2006