Under the deal, the cleric's supporters, known as the Mahdi Army, will disarm and leave the Imam Ali Shrine where they have been holed up.
However, al-Sadr wanted to negotiate how the deal would be implemented, and to ensure his militants would not be arrested said his spokesman, Sheik Hassan al-Athari. He said al-Sadr had other more minor conditions, but did not elaborate.
The cleric's decision came hours after Iraqi Defense Minister Hazem Shaalan said the government was prepared to raid the revered shrine to root out the militants.
"Today is a day to set this compound free from its imprisonment and its vile occupation," Shaalan said.
The peace deal was presented to al-Sadr's aides in Najaf on Tuesday by an eight-person delegation sent by the Iraqi National Conference, meeting this week in Baghdad. Al-Sadr himself declined to meet with the mediators because of the "heavy shelling from the planes and tanks of the U.S. forces," said an aide, Ahmed al-Shaibany.
The peace agreement could spell the end of the two-week resurgence of violence in Najaf that enraged many of the country's majority Shiites and posed the greatest test yet for the fledgling government of interim Prime Minister Iyad Allawi.
A previous cease-fire with al-Sadr's Mahdi Army that ended a spring uprising two months ago collapsed two weeks ago into street battles throughout the city.
Clashes marked by gunfire and explosions continued in Najaf even after the agreement was announced Wednesday. Fighting in Najaf has killed six people and wounded 23 others since Tuesday morning, Hussein Hadi of Najaf General Hospital said Wednesday.
The fighting in Najaf has cast a pall over the conference in Baghdad intended to project an image of amity and inclusiveness on the road to democracy.
Delegates decided to send a peace mission to Najaf on Tuesday to try to solve the crisis and were displeased by the cleric's refusal to meet with them.
"If there were anyone sympathizing with him in the past, there will be none from now on because of this stand," delegate Abdul-Halim al-Ruhaimi said earlier Wednesday.
In threatening to raid the shrine, Shaalan said Iraqi forces were fully trained to oust militants from the holy site, and that U.S. forces would not enter the compound. Any American action against the shrine would almost certainly enrage Iraq's Shiite majority.
As the delegates prepared to vote Wednesday afternoon, a mortar round hit the roof of Iraq's Foreign Ministry building nearby, causing no damage or injuries, Foreign Minister Hoshyar Zebari told the Associated Press.
The blast shook the convention center where the conference was being held under tight security.