Clashes between Iraqi security forces and Shia fighters in Iraq's southern city of Basra raged Wednesday for the second day as unrest spread to other Shia cities and parts of Baghdad.

Heavy fighting broke out in Basra, Iraq's second largest city, as Iraqi ground forces backed by US air and ground support launched a large-scale operation Tuesday to break the grip of Shia militias and criminal gangs controlling the city.

Nearly 30,000 Iraqi army and police forces are involved in the operation, which is directed by Iraqi Prime Minister Nouri al-Maliki, who is the general commander of the armed forces.

Mr Maliki has warned militants in the country's south the will face severe penalties if they don't lay down their arms before the weekend.

Iraq's prime minister made his comments as he continued to oversee the second day of a military operation against Shia militants in the southern port city of Basra.

While he did not specify what the penalties would be for those who continued to fight, he is likely to call in more US support troops who have already clashed with activists in the city, about 120 kilometres south of Baghdad.

Medical sources said at least 40 people had been killed in Basra in the past day of fighting between government military forces and the Mehdi Army militia which is loyal to Shiite cleric Moqtada al-Sadr.

Fighting between Shia militants and Iraqi forces also spread to the capital Baghdad, where 20 people have been killed in the district of Sadr City.