Allawi told a news conference, Reuters reported, "This is the final call for them to disarm, vacate the holy shrine, engage in political work and consider the interests of the homeland"
U.S. aircraft and tanks pounded the area around the mosque a day after Shiite cleric Muqtada al-Sadr, who has been leading the rebellion, appeared amenable to a cease-fire.
In a letter to the Iraqi National Conference meeting in Baghdad, al-Sadr accepted a plan to disarm his fighters, withdraw from the shrine and begin political participation in exchange for amnesty, according to the Associated Press. But he also demanded that he be allowed to negotiate the terms of the plan's implementation, which the government rejected.
His supporters, known as the Mahdi Army, continued battling U.S. and Iraqi forces. And on Thursday, three mortar bombs hit a Najaf police station in quick succession, killing seven police and wounding at least 21 others. Police said Mahdi militiamen fired the mortars.
Following the attack, Al-Sadr vowed to seek "martyrdom or victory," according to the AP.
Allawi issued his final warning shortly after al-Sadr's declaration. Allawi said he welcomed the sometimes conciliatory statements by al-Sadr and his aides "provided that they crystallize it into tangible and committed positions through a document declaration from him personally," Reuters reported.
Iraqi Minister of State Kasim Daoud told a news conference in Najaf that the government had exhausted all peaceful means to persuade al-Sadr to back down and was determined to impose a military solution unless the cleric surrendered.
Daoud declined to say whether the government would storm the shrine itself. Such a move could provoke outrage among the country's majority Shiite population, particularly if U.S. forces were involved.
About 2,000 U.S. Marines have surrounded the city and pounded the militia for two weeks with planes, helicopter gunships and tanks but have avoided attacking the shrine directly.
Iraqi officials have said an elite squad of Iraqi troops could lead an assault on the poorly trained militants and U.S. troops would not enter the holy site, the AP reported.
The violence in Najaf has spread to other communities, including Sadr City in Baghdad, where eight people have been killed and 40 injured in fighting between U.S. forces and al-Sadr loyalists since Wednesday, said hospital official Yasser Abed Ali.
In addition, a mortar hit the roof of the U.S. Embassy in Baghdad Thursday evening local time, slightly wounding two American employees, an embassy spokesman said, according to CNN. U.S. Ambassador John Negroponte was not in Iraq at the time.