So far, al-Sadr has shown no signs of ordering his forces to disarm. This leaves Allawi facing the first real test of his barely six weeks in office. Allawi has carefully cultivated a hard-line image that he believes will appeal to Iraqis desperate for greater security. But will that strategy be enough to deal with the crisis with al-Sadr?
"This amnesty is not for people who have committed crimes, who have killed. The criminals will be brought to justice." That is Allawi showing his tough side -- a side that has been much in display in recent weeks.
As he offered a 30-day amnesty on 7 August to people who had committed minor crimes involving support of the insurgency, he made it clear there would be no mercy for those involved in deadly attacks.
To emphasize the point, his government issued a decree the next day reinstating the death penalty, which had been suspended under the U.S.-led Coalition Provisional Authority.
"Allawi is in a Catch-22 situation. If he wants to be tough and re-establish law and order he has to call on the Americans. And if he wants to be conciliatory, that means giving more leeway to the militants"
The decree made the death penalty applicable to actions such as "endangering national security" and "crimes against transportation" -- such as ambushes and hijackings -- as well offenses like drug trafficking, rape and murder.
These measures have helped support Allawi's tough image since he became prime minister in late June. But the full measure of his hard-line approach to security came this week as he faced his first real test in office -- dealing with the renewed outbreak of fighting in Al-Najaf.
As militants loyal to al-Sadr attacked Iraqi police stations and clashed with U.S.-led coalition troops, Allawi flew to Al-Najaf from Baghdad on 9 August in an American Black Hawk combat helicopter.
After meeting with U.S. Marine commanders, Allawi vowed that there would be "no negotiation with any militia that bears arms against Iraq" and demanded gunmen leave the Shi'a shrine city.
"Unfortunately, there are people who have done things against the law who are trying to hurt this city -- this heroic and steadfast city. We came here to check the city and to hold talks with the governor whose position is a heroic one and an honorable one. We also came here to talk with the police and member of the national guard. And we hope that this matter will end as soon as possible. We believe the gunmen should leave the holy sites quickly, lay down their weapons and return to the rule of order and law," Allawi said.
But as he demanded that al-Sadr disarm his militia, Allawi left maneuvering room for the cleric himself. He repeated a longstanding invitation to al-Sadr to take part in elections due by the end of January.
So far, al-Sadr and his Imam Al-Mahdi Army fighters -- who demand an immediate end to the American occupation -- have shown no sign of accepting Allawi's terms. The cleric urged his followers on 11 August to keep fighting U.S. forces even if he were killed or captured.
Asad Turki Swari, the spokesman for al-Sadr in Baghdad's Al-Kharkh district, told RFE/RL on 10 August that the cleric wants general elections as soon as possible and a timetable for the departure of foreign forces from Iraq.
Swari also accused Allawi's government of taking advantage of the absence of preeminent Shi'a cleric Ayatollah Ali al-Sistani from Al-Najaf to attack the Al-Mahdi militia in the city. Al-Sistani is currently in London seeking treatment for a heart condition.
"Ayatollah al-Sistani has a health problem that has been worsening for a long time. The key thing is that he is the safety valve of this city and what happened is that the Iraqi government and also the American forces knew about his departure. We do not want to be misunderstood as saying that there was any coordination between Ayatollah al-Sistani and the Iraqi interim government and the occupying forces, God forbid! But because the Iraqi government and the occupying forces knew that Ayatollah al-Sistani would be leaving at this time, they escalated the situation," Swari said.
"They had several motives in doing so. First, they are trying to distort the image of Ayatollah al-Sistani in Iraqi society, so people will think there is a consensus against Mr. Muqtada al-Sadr. And secondly, they wanted to seize this opportunity to storm the holy city of Najaf after the departure of Ayatollah al-Sistani, so [the assault] would not provoke lots of problems for the Americans," Swari said.
Sistani, 73, flew from Al-Najaf to London last week for medical tests. News agencies report he may undergo surgery there for heart problems. Prior to the trip, the ayatollah had not left his house in Al-Najaf for six years.
During a previous round of fighting in Al-Najaf in April and May, al-Sistani called for both U.S. forces and al-Sadr's militants to stay out of Shi'a shrine cities. Late in May he called on residents of Al-Najaf and Karbala to protest against the presence of armed forces in their towns. The Shi'a religious establishment was instrumental in pressing for a truce between al-Sadr and U.S. forces in June.
Rime Alaf, a Mideast expert with the Royal Institute for International Affairs in London, says that Allawi forged a hard-line image in his first weeks in office in order to appeal to ordinary Iraqis desperate for greater security in their lives.
But Alaf says that Allawi's tough security stance now may put him in a no-win situation in Al-Najaf. She says that by ruling out negotiations, Allawi has repeated the position taken earlier this year by U.S. forces against insurgents in Al-Fallujah. And by doing so, he has opened himself to some of the same protests from other Iraqi leaders that ultimately forced U.S. forces to negotiate with the insurgents.
"Allawi is in a Catch-22 situation. If he wants to be tough and re-establish law and order he has to call on the Americans. And if he wants to be conciliatory, that means giving more leeway to the militants like they had in Fallujah and like, I believe, they will have no choice but to do in Najaf. There is no way that Najaf can be resolved to a satisfactory conclusion for any of the parties. If they do further damage to the holy sites, or if they kill too many of the insurgents -- this is not going to help the perception that Allawi is trying to make, of being independent of the U.S. and that this is a sovereign government," Alaf says.
The analyst says that much of Iraq's political leadership -- including the former U.S.-appointed Iraqi Governing Council (IGC), of which Allawi himself was a member -- sharply criticized the U.S. siege of Al-Fallujah as an excessive use of force. Some IGC members demanded the chance to explore what they called "Iraqi" alternatives of negotiating and consensus-building that might work better than Washington's approach.
The Al-Fallujah crisis finally ended in negotiations and the formation of a force of former soldiers from Al-Fallujah to patrol the city. Today, the city is reported to be outside of the control of U.S. forces and the central government.
Some of the same calls for "Iraqi" solutions are now beginning to be heard from within Allawi's own government in regards to the Al-Najaf crisis.
Iraq's interim Deputy President Ibrahim al-Ja'fari called on 10 August for U.S.-led multinational troops to leave Al-Najaf in order to end the fighting there. Speaking on the Arabic satellite channel Al-Jazeera -- whose Baghdad office Allawi has temporarily ordered closed -- al-Ja'fari said "Iraqi forces can administer Al-Najaf to end this phenomenon of violence in this city that is holy to all Muslims."
Al-Ja'fari also called for keeping "political bridges open" with al-Sadr and his supporters. But he said the Iraqi administration should take what he called "extraordinary" measures if the Imam Al-Mahdi Army kept fighting. He did not elaborate.
As the Al-Najaf crisis deepens, Allawi is likely to come under increasing pressure to show that he is "more Iraqi than American" -- that is, more able to solve Iraq's security problems than are the U.S. forces he has called on for help.
Unless he is able to isolate al-Sadr fully from the Shi'a mainstream and force him to disarm through community pressure, Allawi may well have to negotiate with the cleric despite his vows not to do so.
Fighting has raged in Al-Najaf since a truce brokered in June between the Imam Al-Mahdi Army and U.S. forces broke down a week ago. There is also almost daily fighting between al-Sadr loyalists and coalition forces in several other southern Iraqi cities and in areas of Baghdad.
(RFE/RL stringer in Baghdad Sami Alkhoja contributed to this report)
For more on the situation in Iraq go to RFE/RL's special page, "The New Iraq."