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When Baghdad's notorious Adhamiya district exploded in vicious gun battles last week, few were really surprised. The area, rich with former army, intelligence and secret police officers from Saddam's regime, had been trumpeted by the U.S. military as a former insurgent hot spot brought under control — a success story in the effort to hand over more of the responsibilities for keeping order to the Iraqis. Yet most on the ground knew that beneath the suburb's surface, trouble still brewed. U.S. military intelligence believed the town was still being used by the Ba'ath insurgents as a command headquarters and logistics base, and American officers suspected that Iraqi commanders they're allied with had struck an accord with the guerrilla leadership, promising not to interfere as long as their troops were not attacked.

But all that came apart in the early hours of April 17 when a two-day firefight between local insurgents on one side and Iraqi soldiers and American GIs on the other broke out. Though the encounter was minimized by top U.S. military officials, the battle appears to have been a more serious outbreak of sectarian violence, between well-organized units of the insurgency and what military sources suspect was a Shi'ite death squad linked to the U.S.-backed Iraqi government.

The basic facts of the battle are not in dispute. Some time between 1 a.m. and 3 a.m. on April 17 a well-known Iraqi army checkpoint at a prominent Adhamiya intersection came under intense fire from insurgent forces in the town. Other Iraqi units responded and a blazing battle ensued. American advisors from a Military Transition Team (MiTT) with the 101st Airborne, embedded within the battalion under attack, were called out and were soon fighting for their lives. A coalition quick-reaction force was summoned.

Though the severity of the battle was played down by official U.S. military spokesmen, officers on the ground tell a different story. "It lasted for about seven hours after we arrived, so the enemy was pretty determined. They did not just fade away," says the MiTT team chief Major Chuck Markos, whose men were hit with flurries of rocket propelled grenades and small arms fire. "It was significant." The exchanges lasted until shortly before lunch. By mid-day, the district was boarded up, bereft of traffic or life, but quiet. The next morning at about 6 a.m., hostilities started again, with several more hours of fighting before quiet finally returned. By week's end, the scene was tense but trouble free. Cars are back on the street, but many shops remain closed.

The question is exactly what triggered this battle and who fought it. Sunni community leaders claim that local residents grabbed whatever weapons they had to defend their homes from a sectarian attack by Shi'ite militias in government uniforms. They say night guards, akin to an armed neighborhood watch, fired back at roaming gunmen strafing them as they stood watch. However, American officers say the men they ended up fighting weren't mere homeowners. They used the fire and movement techniques of trained soldiers. "These guys who stood and fought were not just neighborhood types," says Markos, a steely artillery officer from Chattanooga, Tenn. Intelligence officer Capt. Joshua Brandon notes that "a lot of [insurgent] command and logistics comes out of here" and that, along with posters for the locals who died in the fight, "we see lists of martyrs who were not local residents."

One of those insurgent fighters confirmed these suspicions in a clandestine interview with TIME. Abu Marwan, an insurgent footsoldier from the Ansar al-Sunnah network, said that once the fighting broke out, his cell, along with those from other guerrilla groups, was brought in from surrounding quarters as reinforcements. Adhamiya is a safe haven for any number of anti-American organizations, which share intelligence and weapons and coordinate their activities. According to insurgent sources, the groups agreed that only sparing attacks would be launched locally so as not to attract U.S. attention. American brigade commander Col. Thomas Vail says the district's concentration of working poor made it easy for insurgents to hide. "It was easy sanctuary," he says.

Abu Marwan and his cell arrived in the afternoon of the first day's fighting, he says, but there was a lull while they waited for a counterattack that night. His job was to help defend the Abu Hanifa mosque, he says, and when combat resumed the next morning that's what he did. "We heard they were coming," he says of the Iraqi troops, "so we took our positions and started shooting at them from near the mosque. We used PKC [machine guns], RPGs, grenades, everything." The men of the 101st Airborne's MiTT have no reason to doubt him. A U.S. soldier told TIME days later of how RPG rounds had whizzed past his humvee, with one sliding right under it.

Though the insurgents admit to attacking the checkpoint identified by the Americans as ground zero, they claim they did not start the battle. Local clerics, municipal officials, community leaders and the insurgents themselves all say the hostilities were started by a raid from a "death squad" backed by the Ministry of Interior (MOI) — carloads of men in MOI uniforms and irregular forces in civilian clothes who entered Adhamiya after passed through the Iraqi army checkpoints. Indeed, sources within one prominent Shi'ite militia say their men were part of the Adhamiya raid, which was targeting top insurgent leaders holed up in a building. A report prepared by the local council for the Iraqi army claims the men arrived in police and civilian cars and that another group of men in military uniforms attacked from a second direction. The report claims it took 90 minutes before the army units stationed in the area intervened. By then the battle was in full fury, and it was left for the American and Iraqi soldiers to bear the onslaught.

The death squad claims are not far-fetched. Maj. Markos told TIME his men have previously "encountered unauthorized MOI elements" in Adhamiya conducting illegal "snatch-and-grab-type activities." He says, "The bottom line is I can't tell you definitely [what started last week's battle]. But nothing is black and white here and I would be lying to say the MOI is never here." He adds, "We're definitely going to look into" the charges of death-squad involvement. Intelligence officer Brandon admits the fusion of legitimate government forces with militia is a problem. "So many players are tied to the government and to armed militias, and a lot of the time the interests overlap," he says. Major General Rick Lynch sums it up: "We don't know what happened yet." With the Iraqis set to assume more control of the war, and with newly anointed Prime Minister Jawad al-Maliki calling for more militias to be integrated into government forces, the murky battle at Adhamiya could be a harbinger of more troubles to come.

• MICHAEL WARE
• In a murky Baghdad firefight, U.S. forces appear to have been caught between Sunni insurgents and Shi'ite death squads