"Hojjatoleslam Kho’i was knifed by assailants at the mausoleum of Imam Ali while he was saying his prayers", the official Iranian news agency IRNA, the first to report about the assassination, quoted Iraqi opposition sources in the Iranian capital.

"They grabbed hold of the Imam and stabbed him. Then they shot him. The sanctuary became a battlefield", described a correspondent for the London-based, Saudi-owned Arabic-language "Al Sharq al Awsat" daily, adding that Hojjatoleslam Haider Kelida, an aide to Mr. Kho’i, had also been killed.

The son of the late Grand Ayatollah Abolqasem Mousavi al-Kho’i, the cleric had returned to his hometown of Najaf a week ago, coming from London, where he was presiding over the Kho’i Foundation, to organise the life of the Shi’ites in holly cities of Najaf and Karbala, in central Iraq.

His father, the Muslim Shi’ites most senior cleric opposed to the Iranian militant theocracy, had died under suspect circumstances in the aftermath of the Sh’iite uprising against the now vanished Iraqi dictator in 1991. He had been placed under house arrest conditions by the ruling Ba’thist regime that collapsed two days ago.

Grand Ayatollah Kho’i was also close to Iraq's leading Shi'ite leader Grand Ayatollah Ali al-Sistani, a rival to Iranian ayatollahs, who until the fall of Najaf to the American forces ten days ago, was under house arrest. Freed by the Americans, he urged his followers not to hinder the U.S.-led invasion of Iraq.

The attackers reportedly dragged him out of the shrine and shot Mr. Abdolmajid with a gun before killing him with several strokes of knife, eyewitnesses reported.

Though the identity of the assailants and their motives were not known immediately, but sources familiar with Shi’ite affairs suspected that he might have been murdered by terrorists from the rival group based in Tehran and led by Ayatollah Moahammad Baqer al Hakim, the leader of the Iran-backed Supreme Assembly of the Islamic Revolution of Iraq (SAIRI).

Unlike the SAIRI, which says is opposed to American military presence in Iraq, the Kho’i are considered as pro-coalition.

The killings are expected to fuel tension among Iraq's Shi'ite Muslims, who form the majority in the country but ruthlessly oppressed by Saddam Hoseyn, a Sunni Muslim.

"Right now what we need in Iraq is stability, calm and peace and whoever did this damaged these things", Hojjatoleslam Mohsen al-Hakim, a younger brother of Ayatollah Hakim told Reuters.

A spokesman of the al-Kho’i foundation had earlier said in London that the cleric was planned to deliver a speech at the Imam Ali shrine and hold a press conference with foreign journalists.

Only few hours before his death, Abdolmajid had told IRNA Thursday by telephone that he had met with several senior Shiite clerics in Najaf to discuss plans to get the Iraqi holly cities back to normal.

He also denied speculation about having been shunned by tribal leaders in southern Iraq.

Asked about US plans to install a transitional government in Iraq, Abdolmajid said he was unaware of such plans. "I don't interfere in political issues and I will continue to serve only for religious and civilian affairs", he said.

British Prime Minister Tony Blair said he was "appalled" by the death of Khoei who he had met several times in London.

"He was a religious leader who embodied hope and reconciliation and he was committed to building a better future for the people of Iraq", Blair said in a statement.